<PAGE>
As filed with the Securities and Exchange Commission on March 23, 2000
Registration No. 33-26305
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ___ [ ]
POST-EFFECTIVE AMENDMENT NO. 52 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 54 [X]
_____________________________________________
BLACKROCK FUNDS(SM)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Bellevue Corporate Center Brian Kindelan, Esq. copy to:
400 Bellevue Parkway BlackRock Advisors, Inc. Sarah E. Cogan, Esq.
Suite 100 1600 Market Street, 28th Floor Simpson Thacher & Bartlett
Wilmington, Delaware 19809 Philadelphia, PA 19103 425 Lexington Avenue
(Address of Principal (Name and Address of New York, New York 10017
Executive Offices) Agent for Service)
Registrant's Telephone Number
(302) 792-2555
</TABLE>
_____________________________________________
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
----------------
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Low Duration Bond, Intermediate Government Bond,
Intermediate Bond, Core Bond, High Yield Bond, GNMA, Government Income, Managed
Income, International Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, Delaware
Tax-Free Income, Money Market, Municipal Money Market, U.S. Treasury Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market, New Jersey
Municipal Money Market, Large Cap Value Equity, Large Cap Growth Equity, Index
Equity, Small Cap Value Equity, Mid-Cap Value Equity, International Equity,
International Emerging Markets, International Small Cap Equity, Balanced, Small
Cap Growth Equity, Mid-Cap Growth Equity, Micro-Cap Equity and Select Equity
Portfolios, each dated January 28, 2000, are incorporated by reference to the
Registrant's filing of Post-Effective Amendment No. 50 to its Registration
Statement on Form N-1A on January 28, 2000.
The prospectus for the BlackRock Shares of the Low Duration Bond, Core Bond,
Intermediate Bond and High Yield Bond Portfolios, dated January 28, 2000, is
incorporated by reference to the Registrant's filing of Post-Effective Amendment
No. 50 to its Registration Statement on Form N-1A on January 28, 2000.
The prospectuses for the shares of the BlackRock Strategic Portfolio I,
BlackRock Strategic Portfolio II and the Multi-Sector Mortgage Securities
Portfolio III, each dated December 6, 1999, are incorporated by reference to the
Registrant's filing of Post-Effective Amendment No. 49 to its Registration
Statement on Form N-1A on December 6, 1999.
The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
IV, dated January 28, 2000, is incorporated by reference to the Registrant's
filing of Post-Effective Amendment No. 50 to its Registration Statement on Form
N-1A on January 28, 2000.
The prospectus for the Hilliard Lyons Shares of the Money Market Portfolio and
the Municipal Money Market Portfolio, dated October 5, 1999, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 47 to its
Registration Statement on Form N-1A on October 5, 1999.
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Global Science & Technology Portfolio are
incorporated by reference to the Registrant's filing of Post-Effective Amendment
No. 51 to its Registration Statement on Form N-1A on February 15, 2000.
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Low Duration Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, High Yield Bond, Government
Income, Managed Income, International Bond, Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free
Income, Delaware Tax-Free Income, GNMA, Money Market, Municipal Money Market,
U.S. Treasury Money Market, Ohio Municipal Money Market,
<PAGE>
2
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market, New Jersey Municipal Money Market, Large Cap
Value Equity, Large Cap Growth Equity, Index Equity, Small Cap Value Equity,
Mid-Cap Value Equity, International Equity, International Emerging Markets,
International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-Cap
Growth Equity, Select Equity and Micro-Cap Equity Portfolios, and the BlackRock
Shares of the Low Duration Bond, Core Bond, Intermediate Bond and High Yield
Bond Portfolios, dated January 28, 2000, is incorporated by reference to the
Registrant's filing of Post-Effective Amendment No. 50 to its Registration
Statement on Form N-1A on January 28, 2000.
The statements of additional information for the shares of the BlackRock
Strategic Portfolio I, the BlackRock Strategic Portfolio II and the Multi-Sector
Mortgage Securities Portfolio III, dated December 6, 1999, are incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 49 to its
Registration Statement on Form N-1A on December 6, 1999.
The statement of additional information for the shares of the Multi-Sector
Mortgage Securities Portfolio IV, dated January 28, 2000, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 50 to its
Registration Statement on Form N-1A on January 28, 2000.
The statement of additional information for Hilliard Lyons Shares of the Money
Market Portfolio and the Municipal Money Market Portfolio, dated October 5,
1999, is incorporated by reference to the Registrant's filing of Post-Effective
Amendment No. 47 to its Registration Statement on Form N-1A on October 5, 1999.
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Global Science & Technology Portfolio
is incorporated by reference to the Registrant's filing of Post-Effective
Amendment No. 51 to its Registration Statement on Form N-1A on February 15,
2000.
<PAGE>
BLACKROCK FUNDS(SM)
EUROPEAN EQUITY AND
ASIA PACIFIC EQUITY PORTFOLIOS
CROSS REFERENCE SHEET
Item Number Form N-1A, Prospectus
Part A Caption
- ------ -------
1(a) Cover Page
1(b) Back Cover Page
2 The Portfolios - Investment Goal; - Primary Investment
Strategies; - Key Risks
3 The Portfolios - Expenses and Fees
4 The Portfolios - Investment Goal; - Primary Investment
Strategies; - Key Risks
5 Not Applicable
6 The Portfolios - Fund Management; - Management
7 About Your Investment - What Price Per Share Will You
Pay?; - When Must You Pay?; - How Much is the Minimum
Investment?; - How to Sell Shares; - Expedited
Redemptions; -Accounts With Low Balances; - Dividends
and Distributions; -Taxation of Distributions
8 About Your Investment - Which Pricing Option Should You
Choose?; How Much is the Sales Charge?; - Can the Sales
Charge be Reduced or Eliminated?; - Distribution and
Service Plan
9 N/A
<PAGE>
2
Item Number Form N- Statement of Additional
1A, Part B Information Caption
------ --------------------
10 Cover Page
11 Miscellaneous
12 Miscellaneous; Investment Policies; Additional
Investment Limitations
13 Trustees and Officers; Purchase and Redemption
Information
14 Trustees and Officers; Miscellaneous
15 Investment Advisory, Administration,
Distribution and Servicing Arrangements;
Purchase and Redemption Information
16 Portfolio Transactions
17 Shareholder and Trustee Liability of the Fund;
Additional Information Concerning Shares;
Miscellaneous
18 Purchase and Redemption Information; Valuation
of Portfolio Securities
19 Taxes
20 Investment Advisory, Administration,
Distribution and Servicing Arrangements
21 Performance Information
22 N/A
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
[GRAPHIC]
NOT FDIC- May lose value
INSURED No bank guarantee
BlackRock
European Equity
and Asia Pacific
Equity Portfolios
================================================================================
INVESTOR SHARES
BlackRock Funds(SM) is a mutual fund family with 39
investment portfolios. BlackRock Funds are sold
principally through licensed investment professionals.
PROSPECTUS
June __, 2000
[LOGO OF BLACKROCK FUNDS]
The securities described in this prospectus have been registered with the
Securities and Exchange Commission (SEC). The SEC, however, has not judged these
securities for their investment merit and has not determined the accuracy or
adequacy of this prospectus. Anyone who tells you otherwise is committing a
criminal offense.
<PAGE>
Table of
Contents
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
How to find the information you need
<TABLE>
<S> <C>
How to find the information you need........................................ 1
European Equity Portfolio................................................... 2
Asia Pacific Equity Portfolio............................................... 9
</TABLE>
About Your Investment
<TABLE>
<S> <C>
How to Buy/Sell Shares..................................................... 16
Dividends/Distributions/Taxes.............................................. 28
Services for Shareholders.................................................. 29
</TABLE>
<PAGE>
How to Find the
Information You Need
About BlackRock Funds
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This is the BlackRock European Equity and Asia Pacific Equity Portfolios Pro-
spectus. It has been written to provide you with the information you need to
make an informed decision about whether to invest in BlackRock Funds (the Com-
pany).
This prospectus contains information on two of the 16 BlackRock Equity funds.
To save you time, the prospectus has been organized so that each fund has its
own short section. All you have to do is turn to the section for either fund.
Once you read the important facts about the fund or funds that interest you,
read the sections that tell you about buying and selling shares, certain fees
and expenses, shareholder features of the funds and your rights as a
shareholder. These sections apply to both funds.
If you have questions after reading the prospectus, ask your registered
representative for help. Your investment professional has been trained to help
you decide which investments are right for you.
1
<PAGE>
BlackRock
[GRAPHIC] European Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Earnings Growth: The rate of growth in a company's earnings per share from
period to period. Security analysts attempt to identify companies with earnings
growth potential because a pattern of earnings growth generally causes share
prices to increase.
Equity Security: A security, such as stock, representing ownership of a
company. Bonds, in comparison, are referred to as fixed income or debt
securities because they represent indebtedness to the bondholders, not
ownership.
Growth Companies: All stocks are generally divided into the categories of
"growth" or "value," although there are times when a growth fund and value fund
may own the same stock. Growth stocks are companies whose earnings growth
potential appears to the manager to be greater than the market in general and
whose revenue growth is expected to continue for an extended period. These
stocks typically pay relatively low dividends and sell at relatively high
prices. Value stocks are companies that appear to the manager to be undervalued
by the market as measured by certain financial formulas.
Investment Style: Refers to the guiding principles of a mutual fund's
investment choices. The investment style of this fund is European equity,
referring to the type of securities the managers will choose for this fund.
Market Capitalization: Market capitalization refers to the market value of a
company and is calculated by multiplying the number of shares outstanding by
the current price per share.
Morgan Stanley Capital International (MSCI) Europe Index: An unmanaged index
comprised of a sample of companies representative of the market structure of
the following European countries: Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom.
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by European companies. The fund normally invests at least 65%
of its total assets in the equity securities issued by these companies and
normally invests at least 80% of its total assets in equity securities. For
purposes of these investment strategies, the fund manager will determine
whether a company is a European company by examining where its principal
activities are located, its country of organization, the principal trading
market for its stock, the primary source of its revenues and the location of
its assets. The fund also invests in multinational companies and companies that
benefit from European economic activity. The fund primarily buys common stock
but also can invest in preferred stock and securities convertible into common
and preferred stock.
The fund manager generally invests in stocks of European companies with market
capitalizations of at least $1 billion. The fund manager will use the MSCI
Europe Index as a benchmark and seeks to invest in stocks and market sectors
represented in that index. The manager may also invest in stocks outside the
index which meet the manager's investment criteria. The fund invests mainly in
stocks listed on European stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three European countries.
The fund manager seeks to achieve consistent and sustainable performance
through various market cycles by emphasizing stock selection. Stock selection
is determined by looking at companies using a range of valuation criteria,
including the strength of their management and business franchise. The fund
manager will invest primarily in "growth" stocks; however, he may take
advantage of opportunities in "value" stocks at appropriate points in the
market or economic cycle. The manager will also consider factors such as
prospects for relative economic growth
2
<PAGE>
among certain European countries, expected levels of inflation, government
policies influencing business conditions and outlook for currency
relationships.
The fund generally will sell a stock when, in the fund manager's opinion, there
is a deterioration in the company's fundamentals, the company fails to meet
performance expectations, the stock achieves a target price, the underlying
market is overvalued or the stock's relative price momentum declines
meaningfully.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gain from the market upswing, thus reducing the fund's opportunity to achieve
its investment objective. The fund may also hold these securities pending
investments or when it expects to need cash to pay redeeming shareholders.
The fund manager may, when consistent with the fund's investment objective, use
options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending investment
or for speculation to increase returns. The fund may also use forward foreign
currency exchange contracts (obligations to buy or sell a currency at a set
rate in the future) to hedge against movements in the value of foreign
currencies.
The fund may lend some of its securities on a short-term basis in order to earn
extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or
3
<PAGE>
interest paid by foreign securities, or the value of the securities themselves,
may fall if currency exchange rates change), the risk that a security's value
will be hurt by changes in foreign political or social conditions, the
possibility of heavy taxation or expropriation and more difficulty obtaining
information on foreign securities or companies. In addition, a portfolio of
foreign securities may be harder to sell and may be subject to wider price
movements than comparable investments in U.S. companies. There is less
government regulation of foreign securities markets.
On January 1, 1999, eleven European countries implemented a new currency unit
called the "Euro" which is expected to replace the existing national currencies
of these countries by July 1, 2002. Full implementation of the Euro may be
delayed and difficulties with the conversion may significantly impact European
capital markets, resulting in increased volatility in European and world
markets. Individual issuers may suffer substantial losses if they or their
suppliers are not adequately prepared for the transition, which could hurt the
value of shares of the fund.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more broadly
diversified mutual funds.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the fund
held the securities of larger, more established companies.
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
4
<PAGE>
While the fund manager chooses stocks he believes have above average earnings
growth potential, there is no guarantee that the shares will increase in value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other funds
investing primarily in domestic securities because the costs attributable to
investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional collateral
if the value of the securities go up while they are on loan. There is also the
risk of delay in recovering the loaned securities and of losing rights to the
collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction costs
to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as ordinary
income.
When you invest in this fund you are not making a bank deposit. Your investment
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
5
<PAGE>
Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Shareholder transaction
fees are paid out of your investment and annual fund operating expenses are
paid out of fund assets.
This prospectus offers shareholders different ways to invest with three
separate pricing options. You need to understand your choices so that you can
choose the pricing option that is most suitable for you. With one option
(Investor A Shares) you pay a one-time front-end transaction fee each time you
buy shares. The other options (Investor B and Investor C Shares) have no
front-end charges but have higher on-going fees, which are paid over the life
of the investment, and have a contingent deferred sales charge (CDSC) that you
may pay when you redeem your shares. Which option should you choose? It
depends on your individual circumstances. You should know that the lowest
sales charge won't necessarily be the least expensive option over time. For
example, if you intend to hold your shares long term it may cost less to buy A
Shares than B or C Shares.
The tables below explain your pricing options and describe the fees and
expenses that you may pay if you buy and hold Investor A, B and C Shares of
the fund.
Shareholder Fees (Fees paid directly from your investment)
<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
Maximum Front-End Sales
Charge* 5.0% 0.0% 0.0%
(as percentage of offering
price)
Maximum Deferred Sales Charge 0.0% 4.5%** 1.00%***
(as percentage of offering
price)
</TABLE>
* Reduced front-end sales charges may be available. A CDSC of up to 1.00% is
assessed on certain redemptions of Investor A Shares that are purchased
with no initial sales charge as part of an investment of $1,000,000 or
more.
** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC
for Investor B Shares decreases for redemptions made in subsequent years.
After six years there is no CDSC on B Shares. (See page 13 for complete
schedule of CDSCs.)
*** There is no CDSC on C Shares after one year.
6
<PAGE>
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
Advisory Fees
Distribution and service
(12b-1) fees
Other expenses/1/
Total annual fund operating
expenses
Fee waivers and expense
reimbursements*
Net Expenses*
</TABLE>
* BlackRock and BlackRock Distributors, Inc., the fund's distributor, have
contractually agreed to waive or reimburse fees or expenses in order to
limit fund expenses to % (for Investor A Shares) and % (for Investor
B and C Shares) of average daily net assets until June , 2001. The fund may
have to repay some of these waivers and reimbursements to BlackRock in the
following two years. See the "Management" section on page 20 for a
discussion of these waivers and reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses, redemption at the end of each time period and, with respect to B
Shares and C Shares only, no redemption at the end of each time period.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
A Shares*
B Shares**
Redemption
B Shares
No Redemption
C Shares**
Redemption
C Shares
No Redemption
</TABLE>
* Reflects imposition of sales charge.
** Reflects deduction of CDSC.
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Distribution Fees: A
method of charging
distribution-related
expenses against fund
assets.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
Service Fees: Fees that
are paid to BlackRock
and/or its affiliates
for shareholder account
service and
maintenance.
7
<PAGE>
Fund Management
Albert Morillo, Managing Director and head of European equities at BlackRock
International, Ltd. (BIL) will lead the investment team comprised of several
investment analysts specializing in the European markets. Prior to joining BIL
in 2000, Mr. Morillo was an investment director of Scottish Widows Investment
Management, head of its European equity team, and a member of the Investment
Policy Group. Mr. Morillo earned a BSc degree in chemical engineering and an
MBA degree at Edinburgh University. He is a member of the International Board
of the Paris Stock Exchange. Mr. Morillo has co-managed the fund since its
inception.
Kenneth Anderson serves as co-manager of the fund. Prior to joining BIL in
2000, Mr. Anderson was an investment director and the deputy head of the
Scottish Widows Investment Management European equity team. He joined the
European team in 1991 and was appointed investment director in 1995. Mr.
Anderson earned BA and MPhil degrees in economics at Strathclyde and Cambridge
Universities. Mr. Anderson has co-managed the fund since its inception.
8
<PAGE>
BlackRock
[GRAPHIC] Asia Pacific Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by Asia Pacific region companies. The fund normally invests
at least 65% of its total assets in the equity securities issued by these
companies and normally invests at least 80% of its total assets in equity
securities. For purposes of these investment strategies, the fund manager will
determine whether a company is an Asia Pacific region company by examining
where its principal activities are located, its country of organization, the
principal trading market for its stock, the primary source of its revenues and
the location of its assets. The fund invests primarily, but not exclusively, in
companies that benefit from Asia Pacific region economic activity. The fund
primarily buys common stock but also can invest in preferred stock and
securities convertible into common and preferred stock.
The fund manager generally invests in stocks of Asia Pacific region companies
with market capitalizations of at least $500 million whose earnings, the fund
manager believes, are in a strong growth trend or are undervalued. The fund
manager will use the MSCI All Country Asia Pacific Index as a benchmark and
seeks to invest in stocks and market sectors represented in that index.The
manager may also invest in stocks outside the index which meet the manager's
investment criteria. The fund invests mainly in stocks listed on Asia Pacific
region stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three Asia Pacific region countries.
The fund manager seeks to achieve consistent and sustainable performance by
managing risk and by taking advantage of market inefficiencies through a long
term, disciplined and objective investment process. Economic, statistical and
valuation data is analyzed to screen and rank securities. Major sector and
country/regional themes, prevailing economic cycles and
IMPORTANT DEFINITIONS
Earnings Growth: The rate of growth in a company's earnings per share from
period to period. Security analysts attempt to identify companies with earnings
growth potential because a pattern of earnings growth generally causes share
prices to increase.
Equity Security: A security, such as stock, representing ownership of a
company. Bonds, in comparison, are referred to as fixed income or debt
securities because they represent indebtedness to the bondholders, not
ownership.
Investment Style: Refers to the guiding principles of a mutual fund's
investment choices. The investment style of this fund is Asia Pacific equity,
referring to the type of securities the managers will choose for this fund.
Market Capitalization: Market capitalization refers to the market value of a
company and is calculated by multiplying the number of shares outstanding by
the current price per share.
Morgan Stanley Capital International (MSCI) All Country Asia Pacific Index: An
unmanaged index comprised of a sample of companies representative of the market
structure of the following Asia Pacific region countries: Australia, China,
Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, Sri Lanka, Taiwan and Thailand.
9
<PAGE>
well-defined risk parameters are also considered in the portfolio construction
process.
The fund generally will sell a stock when it reaches a target price, which is
when the manager believes it is fully valued or when, in the manager's
opinion, conditions change such that the risk of continuing to hold the stock
is unacceptable when compared to its growth potential.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the
potential gain from the market upswing, thus reducing the fund's opportunity
to achieve its investment objective. The fund may also hold these securities
pending investments or when it expects to need cash to pay redeeming
shareholders.
The fund manager may, when consistent with the fund's investment objective,
use options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending
investment or for speculation to increase returns. The fund may also use
forward foreign currency exchange contracts (obligations to buy or sell a
currency at a set rate in the future) to hedge against movements in the value
of foreign currencies.
The fund may lend some of its securities on a short-term basis in order to
earn extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or interest paid by foreign securities,
or the value of the securities themselves, may fall if currency exchange rates
change), the risk
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that a security's value will be hurt by changes in foreign political or social
conditions, the possibility of heavy taxation or expropriation and more
difficulty obtaining information on foreign securities or companies. In
addition, a portfolio of foreign securities may be harder to sell and may be
subject to wider price movements than comparable investments in U.S. companies.
There is less government regulation of foreign securities markets.
In addition, political and economic structures in emerging market countries may
be undergoing rapid change and these countries may lack the social, political
and economic stability of more developed countries. As a result some of the
risks described above, including the risks of nationalization or expropriation
of assets and the existence of smaller, more volatile and less regulated
markets, may be increased. The value of many investments in emerging market
countries has dropped significantly due to economic and political turmoil in
the past, and may do so again in the future.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more broadly
diversified mutual funds. At times, the markets in certain Asia Pacific region
countries have suffered significant downturns and volatility. Increased social
or political unrest in some or all of these countries could cause further
economic and market uncertainty.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the fund
held the securities of larger, more established companies.
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Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
While the fund manager chooses stocks he believes have above average earnings
growth potential, there is no guarantee that the shares will increase in
value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other
funds investing primarily in domestic securities because the costs
attributable to investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional
collateral if the value of the securities go up while they are on loan. There
is also the risk of delay in recovering the loaned securities and of losing
rights to the collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction
costs to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as
ordinary income.
When you invest in this fund you are not making a bank deposit. Your
investment is not insured or guaranteed by the Federal Deposit Insurance
Corporation or by any bank or governmental agency.
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Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Shareholder transaction
fees are paid out of your investment and annual fund operating expenses are
paid out of fund assets.
This prospectus offers shareholders different ways to invest with three
separate pricing options. You need to understand your choices so that you can
choose the pricing option that is most suitable for you. With one option
(Investor A Shares) you pay a one-time front-end transaction fee each time you
buy shares. The other options (Investor B and Investor C Shares) have no front-
end charges but have higher on-going fees, which are paid over the life of the
investment, and have a contingent deferred sales charge (CDSC) that you may pay
when you redeem your shares. Which option should you choose? It depends on your
individual circumstances. You should know that the lowest sales charge won't
necessarily be the least expensive option over time. For example, if you intend
to hold your shares long term it may cost less to buy A Shares than B or C
Shares.
The tables below explain your pricing options and describe the fees and
expenses that you may pay if you buy and hold Investor A, B and C Shares of the
fund.
Shareholder Fees (Fees paid directly from your investment)
<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
Maximum Front-End Sales
Charge* 5.0% 0.0% 0.0%
(as percentage of offering
price)
Maximum Deferred Sales Charge 0.0% 4.5%** 1.00%***
(as percentage of offering
price)
</TABLE>
* Reduced front-end sales charges may be available. A CDSC of up to 1.00% is
assessed on certain redemptions of Investor A Shares that are purchased
with no initial sales charge as part of an investment of $1,000,000 or
more.
** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC for
Investor B Shares decreases for redemptions made in subsequent years. After
six years there is no CDSC on B Shares. (See page 13 for complete schedule
of CDSCs.)
*** There is no CDSC on C Shares after one year.
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Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
Advisory Fees
Distribution and service
(12b-1) fees
Other expenses/1/
Total annual fund operating
expenses
Fee waivers and expense
reimbursements*
Net Expenses*
</TABLE>
* BlackRock and BlackRock Distributors, Inc., the fund's distributor, have
contractually agreed to waive or reimburse fees or expenses in order to
limit fund expenses to % (for Investor A Shares) and % (for
Investor B and C Shares) of average daily net assets until June , 2001.
The fund may have to repay some of these waivers and reimbursements to
BlackRock in the following two years. See the "Management" section on page
20 for a discussion of these waivers and reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses, redemption at the end of each time period and, with respect to B
Shares and C Shares only, no redemption at the end of each time period.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
A Shares*
B Shares**
Redemption
B Shares
No Redemption
C Shares**
Redemption
C Shares
No Redemption
</TABLE>
* Reflects imposition of sales charge.
** Reflects deduction of CDSC.
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Distribution Fees: A
method of charging
distribution-related
expenses against fund
assets.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
Service Fees: Fees that
are paid to BlackRock
and/or its affiliates
for shareholder account
service and
maintenance.
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<PAGE>
Fund Management
The fund is managed by a team of professionals at BlackRock International, Ltd
(BIL), including the following individuals who have day-to-day responsibility:
Nigel Barry, Managing Director and portfolio manager of BIL since 1996, William
Low, Director and investment manager of BIL since 1996, Donald Gilfillan,
Director and investment manager of BIL since 1996 and Alistair Veitch, Vice
President and investment manager of BIL since 1998. Mr. Barry is the lead
manager for the fund. Mr. Low has primary responsibility for the developed and
emerging equity markets of Asia. Mr. Gilfillan is responsible for Japanese
equity research and portfolio management and Mr. Veitch is responsible for
selected Asian equity markets, both developed and emerging. Prior to joining
BIL, Nigel Barry was Director and head of the Pacific Basin desk at Dunedin
Fund Managers Ltd. Messrs. Barry, Low, Gilfillan and Veitch have co-managed the
fund since its inception.
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[GRAPHIC] About Your Investment
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Buying Shares from a Registered Investment Professional
BlackRock Funds believes that investors can benefit from the advice and ongoing
assistance of a registered investment professional. Accordingly, when you buy
or sell BlackRock Funds Investor Shares, you may pay a sales charge, which is
used to compensate your investment professional for services provided to you.
As a shareholder you pay certain fees and expenses. Shareholder fees are paid
directly from your investment and annual fund operating expenses are paid out
of fund assets and are reflected in the fund's price.
Your registered representative can help you to buy shares by telephone. Before
you place your order make sure that you have read the prospectus and have a
discussion with your registered representative about the details of your
investment
What Price Per Share Will You Pay?
The price of mutual fund shares generally changes every business day. A mutual
fund is a pool of investors' money that is used to purchase a portfolio of
securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $50 million and has 5 million shares outstanding, the net asset value
(NAV) per share is $10. When you buy Investor Shares you pay the NAV/share plus
the sales charge if you are purchasing Investor A Shares.
The funds' investments are valued based on market value, or where market
quotations are not readily available, based on fair value as determined in good
faith by or under the direction of the Company's Board of Trustees. Under some
circumstances certain short-term debt securities will be valued using the
amortized cost method.
Since the NAV changes daily, the price you pay for your shares depends on the
time that your order is received by the BlackRock Funds' transfer agent, whose
job it is to keep track of shareholder records.
PFPC, the Company's transfer agent, will probably receive your order from your
registered representative, who takes your order. However, you can also fill out
a purchase application and mail it
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to the transfer agent with your check. Please call (800) 441-7762 for a
purchase application. Purchase orders received by the transfer agent before
the close of regular trading on the New York Stock Exchange (NYSE) (currently
4 p.m. (Eastern time)) on each day the NYSE is open will be priced based on
the NAV calculated at the close of trading on that day plus any applicable
sales charge. NAV is calculated separately for each class of shares of each
fund at 4 p.m. (Eastern time) each day the NYSE is open. Shares will not be
priced on days the NYSE is closed. Purchase orders received after the close of
trading will be priced based on the next calculation of NAV. The foreign
securities and certain other securities held by the funds may trade on days
when the NYSE is closed. In these cases, net asset value of shares may change
when fund shares cannot be bought or sold.
When you place a purchase order, you need to specify whether you want Investor
A, B or C Shares. If you do not specify a class, you will receive Investor A
Shares.
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When Must You Pay?
Payment for an order must be made by your registered representative in
immediately available funds by 4 p.m. (Eastern time) on the third business day
following PFPC's receipt of the order. If payment is not received by this
time, the order will be canceled and you and your registered representative
will be responsible for any loss to a fund. For shares purchased directly from
the transfer agent, a check payable to BlackRock Funds and bearing the name of
the fund you wish to buy must accompany a completed purchase application. The
Company does not accept third-party checks. You may also wire Federal funds to
the transfer agent to purchase shares, but you must call PFPC at (800) 441-
7762 before doing so to confirm the wiring instructions.
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How Much is the Minimum Investment?
The minimum investment for the initial purchase of Investor Shares is $500.
There is a $50 minimum for all later investments. The Company permits a lower
initial investment if you are an employee of the Company or one of its service
providers or if you participate in the Automatic Investment Plan in which
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you make regular, periodic investments through a savings or checking account.
Your investment professional can advise you on how to begin an Automatic
Investment Plan. The Company won't accept a purchase order of $1 million or
more for Investor B or Investor C Shares. The fund may reject any purchase
order, modify or waive the minimum investment requirements and suspend and
resume the sale of any share class of the Company at any time.
Which Pricing Option Should You Choose?
BlackRock Funds offers different pricing options to investors in the form of
different share classes. Your registered representative can help you decide
which option works best for you. Through this prospectus, you can choose from
Investor A, B, or C Shares.
A Shares (Front-End Load)
.One time sales charge paid at time of purchase
.Lower ongoing fees
.Free exchange with other A Shares in BlackRock Funds family
.Advantage: Makes sense for investors who have long-term investment horizon
because ongoing fees are less than for other Investor Share classes.
.Disadvantage: You pay sales charge up-front, and therefore you start off own-
ing fewer shares.
B Shares (Back-End Load)
.No front-end sales charge when you buy shares
.You pay sales charge when you redeem shares. It is called a contingent
deferred sales charge (CDSC) and it declines over 6 years from a high of 4.5%.
.Higher ongoing fees than A Shares
.Free exchange with other B Shares in BlackRock Funds family
.Automatically convert to A Shares eight years from purchase
.Advantage: No up-front sales charge so you start off owning more shares.
.Disadvantage: You pay higher ongoing fees than on A Shares each year you own
shares, which means that you can expect lower total performance per share.
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<PAGE>
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C Shares (Level Load)
.No front-end sales charge when you buy shares
.Contingent deferred sales charge (CDSC) of 1.00% if shares are redeemed within
12 months of purchase
.Higher ongoing fees than A Shares
.Free exchange with other C Shares in BlackRock Funds family
.Advantage: No up-front sales charge so you start off owning more shares. These
shares may make sense for investors who have a shorter investment horizon rel-
ative to A or B Shares.
.Disadvantage: You pay higher ongoing fees than on A shares each year you own
shares, which means that you can expect lower total performance per share.
Shares do not convert to A Shares.
Investor B Shares received through the reinvestment of dividends and
distributions convert to A Shares 8 years after the reinvestment or at the same
time as the conversion of the investor's most recently purchased B Shares that
were not received through reinvestment (whichever is earlier).
If a shareholder acquiring Investor A Shares on or after May 1, 1998 later
meets the requirements for purchasing Institutional Shares of a fund (other
than due to changes in market value), then the shareholder's Investor A Shares
will automatically be converted to Institutional Shares of the same fund having
the same total net asset value as the shares converted.
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How Much is the Sales Charge?
The table below shows the schedule of front-end sales charges that you may pay
if you buy and sell Investor A, B and C Shares of the funds.
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Purchase of Investor A Shares
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The following table shows the front-end sales charges that you may pay if you
buy Investor A Shares. The offering price for Investor A Shares includes any
front-end sales charge.
<TABLE>
<CAPTION>
AMOUNT OF SALES CHARGE AS SALES CHARGE AS
TRANSACTION AT % OF OFFERING % OF NET ASSET
OFFERING PRICE PRICE* VALUE*
<S> <C> <C>
Less than $50,000 5.00% 5.26%
$50,000 but less than
$100,000 4.75% 4.99%
$100,000 but less than
$250,000 4.50% 4.71%
$250,000 but less than
$500,000 3.50% 3.83%
$500,000 but less than
$1,000,000 2.50% 2.56%
$1 million or more 0.00% 0.00%
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares; however, you will pay a CDSC of 1.00% of the offering
price or the net asset value of the shares on the redemption date (whichever
is less) for shares redeemed within 18 months after purchase.
Purchase of Investor B Shares
Investor B Shares are subject to a CDSC at the rates shown in the chart below if
they are redeemed within six years of purchase. The CDSC is based on the
offering price or the net asset value of the B Shares on the redemption date
(whichever is less). The amount of any CDSC an investor must pay depends on the
number of years that elapse between the date of purchase and the date of
redemption.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS %
OF DOLLAR AMOUNT
NUMBER OF YEARS SUBJECT TO THE
ELAPSED SINCE PURCHASE CHARGE)
<S> <C>
Up to one year 4.50%
More than one but less than two years 4.00%
More than two but less than three
years 3.50%
More than three but less than four
years 3.00%
More than four but less than five
years 2.00%
More than five but less than six
years 1.00%
More than six years 0.00%
</TABLE>
Purchase of Investor C Shares
Investor C Shares are subject to a CDSC of 1.00% if they are redeemed within 12
months after purchase. The 1.00% is based on the offering price or the net
asset value of the C Shares on the redemption date (whichever is less). There
is no CDSC on C Shares redeemed after 12 months.
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When an investor redeems Investor B Shares or Investor C Shares, the redemption
order is processed so that the lowest CDSC is charged. Investor B Shares and
Investor C Shares that are not subject to the CDSC are redeemed first. After
that, the Company redeems the Shares that have been held the longest.
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Can the Sales Charge be Reduced or Eliminated?
There are several ways in which the sales charge can be reduced or eliminated.
Purchases of Investor A Shares at certain fixed dollar levels, known as
"breakpoints," cause a reduction in the front-end sale charge. The CDSC on
Investor B Shares can be reduced depending on how long you own the shares.
(Schedules of these reductions are listed above in the "Purchase of Investor A
Shares" and "Purchase of Investor B Shares" sections.) Purchases by certain
individuals and groups may be combined in determining the sales charge on
Investor A Shares. The following are also ways the sales charge can be reduced
or eliminated.
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Right of Accumulation (Investor A Shares)
Investors have a "right of accumulation" under which the current value of an
investor's existing Investor A Shares in any fund that is subject to a front-
end sales charge, or the total amount of an initial investment in such shares
less redemptions (whichever is greater), may be combined with the amount of the
current purchase in the same fund in determining the amount of the sales
charge. In order to use this right, the investor must alert the Company's
transfer agent, PFPC, of the existence of previously purchased shares.
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Letter of Intent (Investor A Shares)
An investor may qualify for a reduced front-end sales charge immediately by
signing a "Letter of Intent" stating the investor's intention to buy a
specified amount of Investor A Shares within the next 13 months that would, if
bought all at once, qualify the investor for a reduced sales charge. The Letter
of Intent may be signed anytime within 90 days after the first investment to be
covered by the letter. The initial investment must meet the minimum initial
purchase requirement and represent at least 5% of the total intended purchase.
The investor must tell PFPC that later purchases are subject to the
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Letter of Intent. During the term of the Letter of Intent, PFPC will hold
Investor A Shares representing 5% of the indicated amount in an escrow account
for payment of a higher sales load if the full amount indicated in the Letter
of Intent is not purchased. Any redemptions made during the term of the Letter
of Intent will be subtracted from the amount of the total purchase indicated in
the letter. If the full amount indicated is not purchased within the 13-month
period, and the investor does not pay the higher sales load within 20 days,
PFPC will redeem enough of the Investor A Shares held in escrow to pay the
difference.
Reinvestment Privilege (Investor A Shares)
Upon redeeming Investor A Shares, an investor has a one-time right, for a period
of up to 60 days, to reinvest the proceeds in A Shares of another fund without
any sales charge. To exercise this right, PFPC must be notified of the
reinvestment in writing at the time of purchase by the purchaser or his or her
registered representative. Investors should consult a tax adviser concerning
the tax consequences of using this reinvestment privilege.
Quantity Discounts (Investor A Shares)
In addition to quantity discounts for individuals which we discussed above,
there are ways for you to reduce the front-end sales charge by combining your
order with the orders of certain members of your family and members of certain
groups you may belong to. For more information on these discounts, please
contact PFPC at (800) 441-7762 or see the SAI.
Waiving the Sales Charge (Investor A Shares)
Certain investors, including some people associated with the Company and its
service providers, may buy Investor A Shares without paying a sales charge. For
more information on the waivers, please contact PFPC at (800) 441-7762 or see
the SAI.
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Waiving the Contingent Deferred Sales Charge (Investor B and Investor C Shares)
The CDSC on Investor B and Investor C Shares is not charged in certain
circumstances, including share exchanges (see page 26) and redemptions made in
connection with certain retirement plans and in connection with certain
shareholder services offered by the Company. For more information on these
waivers, please contact PFPC at (800)-441-7762 or see the SAI.
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Distribution and Service Plan
The Company has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the Plan) that allows the Company to pay distribution and other fees for
the sale of its shares and for certain services provided to its shareholders.
Under the Plan, Investor Shares pay a fee (distribution fees) to BlackRock
Distributors, Inc. (the Distributor) or affiliates of PNC Bank for distribution
and sales support services. The distribution fees may be used to pay the
Distributor for distribution services and to pay the Distributor and PNC Bank
affiliates for sales support services provided in connection with the sale of
Investor Shares. The distribution fees may also be used to pay brokers,
dealers, financial institutions and industry professionals (Service
Organizations) for sales support services and related expenses. Investor A
Shares pay a maximum distribution fee of .10% per year of the average daily net
asset value of each fund. Investor B and C Shares pay a maximum of .75% per
year. The Plan also allows the Distributor, PNC Bank affiliates and other
companies that receive fees from the Company to make payments relating to
distribution and sales support activities out of their past profits or other
sources.
Under the Plan, the Company may enter into arrangements with Service
Organizations (including PNC Bank and its affiliates). Under these
arrangements, Service Organizations will provide certain support services to
their customers who own Investor Shares. The Company may pay a shareholder
servicing fee of up to .25% per year of the average daily net asset value of
Investor Shares owned by each Service Organization's customers.
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In return for that fee, Service Organizations may provide one or more of the
following services:
(1) Responding to customer questions on the services performed by the Service
Organization and investments in Investor Shares;
(2) Assisting customers in choosing and changing dividend options, account
designations and addresses; and
(3) Providing other similar shareholder liaison services.
For a separate shareholder processing fee of up to .15% per year of the average
daily net asset value of Investor Shares owned by each Service Organization's
customers, Service Organizations may provide one or more of these additional
services:
(1) Processing purchase and redemption requests from customers and placing
orders with the Company's transfer agent or the Distributor;
(2) Processing dividend payments from the Company on behalf of customers;
(3) Providing sub-accounting for Investor Shares beneficially owned by
customers or the information necessary for sub-accounting; and
(4) Providing other similar services.
The shareholder servicing fees and shareholder processing fees payable pursuant
to the Plan are fees payable for the administration and servicing of
shareholder accounts and not costs which are primarily intended to result in
the sale of the fund's shares.
Because the fees paid by the Company under the Plan are paid out of Company
assets on an on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
24
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How to Sell Shares
You can redeem shares at any time (although certain verification may be required
for redemptions in excess of $25,000 or in certain other cases). The Company
will redeem your shares at the next net asset value (NAV) calculated after your
order is received by the fund's transfer agent minus any applicable CDSC.
Except when CDSCs are applied, BlackRock Funds will not charge for redemptions.
Shares may be redeemed by sending a written redemption request to BlackRock
Funds c/o PFPC, P.O. Box 8907, Wilmington, DE 19899-8907.
You can also make redemption requests through your registered investment
professional, who may charge for this service. Shareholders should indicate
whether they are redeeming Investor A, Investor B or Investor C Shares. If a
shareholder owns more than one class of a fund and does not indicate which
class he or she is redeeming, the Company will redeem shares so as to minimize
the CDSC charged.
Unless another option is requested, payment for redeemed shares is normally
made by check mailed within seven days after PFPC receives the redemption
request. If the shares to be redeemed have been recently purchased by check,
PFPC may delay the payment of redemption proceeds for up to 15 days after the
purchase date to make sure that the check has cleared.
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Expedited Redemptions
If a shareholder has given authorization for expedited redemption, shares can be
redeemed by telephone and the proceeds sent by check to the shareholder or by
Federal wire transfer to a single previously designated bank account. You are
responsible for any charges imposed by your bank for this service. Once
authorization is on file, PFPC will honor requests by telephone at (800) 441-
7762. The Company is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Company may refuse a telephone
redemption request if it believes it is advisable to do so and may use
reasonable procedures to make sure telephone instructions are genuine. The
Company and its service providers will not be liable for any loss that results
from acting upon telephone instructions that they reasonably believed to be
genuine in accordance with those procedures. The Company may alter the terms of
or terminate this expedited redemption
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privilege at any time. Any redemption request of $25,000 or more must be in
writing.
The Company's Rights
The Company may:
.Suspend the right of redemption if trading is halted or restricted on the
NYSE or under other emergency conditions.
.Postpone date of payment upon redemption if trading is halted or
restricted on the NYSE or under other emergency conditions or as described
in the section "How to Sell Shares" above
.Redeem shares involuntarily in certain cases, such as when the value of a
shareholder account falls below a specified level, as described below
.Redeem shares for property other than cash if conditions exist which make
cash payments undesirable
in accordance with its rights under the Investment Company Act of 1940.
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Accounts with Low Balances
The Company may redeem a shareholder's account in a fund at any time the net
asset value of the account in such fund falls below the required minimum
initial investment as the result of a redemption or an exchange request. The
shareholder will be notified in writing that the value of the account is less
than the required amount and the shareholder will be allowed 30 days to make
additional investments before the redemption is processed.
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Management
BlackRock Funds' Adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was
organized in 1994 to perform advisory services for investment companies and is
located at 345 Park Avenue, New York, NY 10154. BlackRock is a wholly-owned
subsidiary of BlackRock, Inc., one of the largest publicly traded investment
management firms in the United States with $164.5 billion of assets under
management as of December 31, 1999. BlackRock, Inc. is a majority-owned
subsidiary of PNC Bank Corp., one of the largest diversified financial services
companies in the United States. BlackRock International, Ltd.
26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Adviser: The Adviser of
a mutual fund is
responsible for the
overall investment
management of the Fund.
The Adviser for
BlackRock Funds is
BlackRock Advisors,
Inc.
Sub-Adviser: The sub-
adviser of the fund is
responsible for its
day-to-day management
and will generally make
all buy and sell
decisions. The sub-
adviser also provides
research and credit
analysis. The sub-
adviser for the funds
is BlackRock
International, Ltd.
(BIL), an affiliate of BlackRock located at 7 Castle Street, Edinburgh,
Scotland EH2 3AH, acts as sub-adviser to the funds.
For their investment advisory and sub-advisory services, BlackRock and BIL are
entitled to fees computed daily and payable monthly.
The maximum annual advisory fee that can be paid to BlackRock (as a percentage
of average daily net assets) is as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT
ASSETS ADVISORY FEE
<S> <C>
First $1 billion
$1 billion-$2 billion
$2 billion-$3 billion
more than $3 billion
</TABLE>
As discussed above, BlackRock and the Distributor have agreed to cap each
fund's net expenses at the levels shown in the fund's expense table.
To achieve this cap, BlackRock and the Company have entered into an expense
limitation agreement. The agreement sets a limit on certain of the operating
expenses of each fund through June , 2001 and requires BlackRock to waive or
reimburse fees or expenses if these operating expenses exceed that limit. The
expense limit (which applies to expenses charged on fund assets as a whole, but
not expenses separately charged to the different share classes of the fund) as
a percentage of average daily net assets is % for the European Equity
Portfolio and % for the Asia Pacific Equity Portfolio.
If within two years following a waiver or reimbursement the operating expenses
of a fund are less than the expense limit for the fund, the fund is required to
repay BlackRock up to the amount of fees waived or expenses reimbursed under
the agreement if: (1) the fund has more than $50 million in assets, (2)
BlackRock continues to be the fund's investment adviser and (3) the Board of
Trustees of the Company has approved the payments to BlackRock on a quarterly
basis.
In addition, through June , 2001, BlackRock and the Distributor have
contractually agreed to waive distribution and service fees on Investor A
Shares in the amount of .095% of average daily net assets for each fund.
27
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividends and Distributions
BlackRock Funds makes two kinds of distributions to shareholders: dividends and
net capital gain.
Dividends are the net investment income derived by a fund and are paid within
10 days after the end of each quarter. The Company's Board of Trustees may
change the timing of dividend payments.
Net capital gain occurs when a fund manager sells securities at a profit. Net
capital gain (if any) is distributed to shareholders at
least annually at a date determined by the Company's Board of Trustees.
Your distributions will be reinvested at net asset value in new shares of the
same class of the fund unless you instruct PFPC in writing to pay them in cash.
There are no sales charges on these reinvestments.
Taxation of Distributions
Distributions paid out of a fund's "net capital gain" will be taxed to
shareholders as long-term capital gains, regardless of how long a shareholder
has owned shares. All other distributions will be taxed to shareholders as
ordinary income.
Your annual tax statement from the Company will present in detail the tax
status of your distributions for each year.
If more than half of the total asset value of a fund is invested in foreign
stock or securities, the fund may elect to "pass through" to its shareholders
the amount of foreign taxes paid. In such case each shareholder would be
required to include his proportionate share of such taxes in his income and may
be entitled to deduct or credit such taxes in computing his taxable income.
Distributions paid by a fund with respect to certain qualifying dividends
received by the fund from domestic corporations may be eligible for the
Corporate dividends received deduction.
Use of the exchange privilege will be treated as a taxable event and may be
subject to federal, state and local income tax.
Because every investor has an individual tax situation, and also because the
tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares
of the Company.
28
<PAGE>
[GRAPHIC] Services for Shareholders
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BlackRock Funds offers shareholders many special features which can enable
investors to have greater investment flexibility as well as more access to
information about the Company.
Additional information about these features is available by calling PFPC at
(800) 441-7762.
- --------------------------------------------------------------------------------
Exchange Privilege
BlackRock Funds offers 39 different funds, enough to meet virtually any
investment need. Once you are a shareholder, you have the right to exchange
Investor A, B, or C Shares from one fund to another to meet your changing
financial needs. For example, if you are in a fund that has an investment
objective of long term capital growth and you are nearing retirement, you may
want to switch into another fund that has current income as an investment
objective. For information on the Company's other funds, please call PFPC at
(800) 441-7762.
You can exchange $500 (or any other applicable minimum) or more from one
BlackRock Fund into another. Investor A, Investor B and Investor C Shares of
each fund may be exchanged for shares of the same class of other funds which
offer that class of shares, based on their respective net asset values. (You
can exchange less than $500 if you already have an account in the fund into
which you are exchanging.) Because different funds have different sales
charges, the exchange of Investor A Shares may be subject to the difference
between the sales charge already paid and the higher sales charge (if any)
payable on the shares acquired as a result of the exchange. For Federal income
tax a share exchange is a taxable event and a capital gain or loss may be
realized. Please consult your tax or other financial adviser before making an
exchange request.
The exchange of Investor B and Investor C Shares will not be subject to a CDSC.
The CDSC will continue to be measured from the date of the original purchase
and will not be affected by the exchange.
29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To make an exchange, you must send a written request to PFPC at P.O. Box 8907,
Wilmington, DE 19899-8907. You can also make exchanges via telephone
automatically, unless you previously indicated that you did not want this
option. If so, you may not use telephone exchange privileges until completing a
Telephone Exchange Authorization Form. To receive a copy of the form contact
PFPC. The Company has the right to reject any telephone request.
In general, there are no limits on the number of exchanges you can make.
However, the Company may suspend or terminate your exchange privilege at any
time and generally will do so if you make more than five exchanges out of any
fund in any twelve month period.
The Company reserves the right to modify, limit the use of, or terminate the
exchange privilege at any time.
Automatic Investment Plan (AIP)
If you would like to establish a regular, affordable investment program,
BlackRock Funds makes it easy to set up. As an investor in any BlackRock Fund
portfolio, you can arrange for periodic investments in that fund through
automatic deductions from a checking or savings account by completing the AIP
Application Form. The minimum investment amount for an automatic investment
plan is $50. AIP Application Forms are available from PFPC.
Retirement Plans
Shares may be purchased in conjunction with individual retirement accounts
(IRAs) and rollover IRAs where PNC Bank or any of its affiliates acts as
custodian. For more information about applications or annual fees, please
contact the Fund Agent, PFPC Inc., at P.O. Box 8907, Wilmington, DE 19899-8907
or call 1-800-441-7762. To determine if you are eligible for an IRA and whether
an IRA will benefit you, consult with a tax adviser.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market Timing
The funds are not designed for market time organizations or other entities using
programmed or frequent exchanges. The Company reserves the right to reject any
specific purchase order, including an order made by a market timer.
Any redemption that is made as a result of this activity will be subject to any
and all redemption fees.
- --------------------------------------------------------------------------------
Statements
Every BlackRock shareholder automatically receives regular account statements.
In addition, for tax purposes, shareholders also receive a yearly statement
describing the characteristics of any dividends or other distributions
received.
- --------------------------------------------------------------------------------
Systematic Withdrawal Plan (SWP)
This feature can be used by investors who want to receive regular distributions
from their accounts. To start a SWP a shareholder must have a current
investment of $10,000 or more in a fund. Shareholders can elect to receive cash
payments of $50 or more monthly, every other month, quarterly, semi-annually or
annually. Shareholders may sign up by completing the SWP Application Form which
may be obtained from PFPC. Shareholders should realize that if withdrawals
exceed income the invested principal in their account will be depleted.
To participate in the SWP, shareholders must have their dividends automatically
reinvested and may not hold share certificates. Shareholders may change or
cancel the SWP at any time, upon written notice to PFPC. If an investor
purchases additional Investor A Shares of a fund at the same time he or she
redeems shares through the SWP, that investor may lose money because of the
sales charge involved. No CDSC will be assessed on redemptions of Investor B or
Investor C Shares made through the SWP that do not exceed 12% of the account's
net asset value on an annualized basis. For example, monthly, quarterly and
semi-annual SWP redemptions of Investor B or Investor C Shares will not be
subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an
account's net asset value on the redemption date. SWP redemptions of Investor B
or Investor C Shares in excess of this limit will still pay the applicable
CDSC.
31
<PAGE>
For more information:
This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the BlackRock Funds is available free, upon request, including:
Annual/Semi-Annual Reports
These reports contain additional information about the funds' investments. The
annual report describes the funds' performance, lists portfolio holdings and
discusses recent market conditions, economic trends and fund investment
strategies that significantly affected the funds' performance during the last
fiscal year.
Statement of Additional Information (SAI)
A Statement of Additional Information dated June , 2000 has been filed with the
Securities and Exchange Commission (SEC). The SAI, which includes additional
information about the BlackRock Funds, may be obtained free of charge, along
with the Company's annual and semi-annual reports, by calling (800) 441-7762.
The SAI, as supplemented from time to time, is incorporated by reference into
this prospectus.
Shareholder Account Service Representatives
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 9 a.m. to
6 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7762
Purchases and Redemptions
Call your registered representative or (800) 441-7762.
World Wide Web
Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com
Email
Request prospectuses, SAI, Annual or Semi-Annual Reports and literature. Forward
mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected]
Written Correspondence
Post Office Address: BlackRock Funds c/o PFPC Inc., P.O. Box 8907,
Wilmington, DE 19899-8907
Street Address: BlackRock Funds, c/o PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809
Internal Wholesalers/Broker Dealer Support
Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call (888) 8BLACKROCK
Securities and Exchange Commission (SEC)
You may also view and copy information about the BlackRock Funds, including the
SAI, by visiting the EDGAR Database on the SEC Web site (http://www.sec.gov) or
the SEC's Public Reference Room in Washington, D.C. Information about the
operation of the public reference room can be obtained by calling the SEC
directly at 1-202-942-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
[GRAPHIC]
[LOGO OF BLACKROCK FUNDS]
INVESTMENT COMPANY ACT FILE NO. 811-05742
<PAGE>
[GRAPHIC]
NOT FDIC- May lose value
INSURED No bank guarantee
BlackRock
European Equity
and Asia Pacific
Equity Portfolios
================================================================================
SERVICE SHARES
BlackRock Funds(SM) is a mutual fund family with
39 investment portfolios.
PROSPECTUS
June --, 2000
[LOGO OF BLACKROCK FUNDS]
The securities described in this prospectus have been registered with the
Securities and Exchange Commission (SEC). The SEC, however, has not judged these
securities for their investment merit and has not determined the accuracy or
adequacy of this prospectus. Anyone who tells you otherwise is committing a
criminal offense.
<PAGE>
Table of
Contents
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
How to find the information you need
<TABLE>
<S> <C>
How to find the information you need........................................ 1
European Equity Portfolio................................................... 2
Asia Pacific Equity Portfolio............................................... 7
</TABLE>
About Your Investment
<TABLE>
<S> <C>
Buying Shares.............................................................. 12
Selling Shares............................................................. 15
Dividends/Distributions/Taxes.............................................. 19
</TABLE>
<PAGE>
How to Find the
Information You Need
About BlackRock Funds
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This is the BlackRock European Equity and Asia Pacific Equity Portfolios Pro-
spectus. It has been written to provide you with the information you need to
make an informed decision about whether to invest in BlackRock Funds (the Com-
pany).
This prospectus contains information on two of the 16 BlackRock Equity funds.
To save you time, the prospectus has been organized so that each fund has its
own short section. All you have to do is turn to the section for either fund.
Once you read the important facts about the fund or funds that interest you,
read the sections that tell you about buying and selling shares, certain fees
and expenses, shareholder features of the funds and your rights as a
shareholder. These sections apply to both funds.
1
<PAGE>
BlackRock
[GRAPHIC] European Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Earnings Growth: The rate of growth in a company's earnings per share from
period to period. Security analysts attempt to identify companies with earnings
growth potential because a pattern of earnings growth generally causes share
prices to increase.
Equity Security: A security, such as stock, representing ownership of a
company. Bonds, in comparison, are referred to as fixed income or debt
securities because they represent indebtedness to the bondholders, not
ownership.
Growth Companies: All stocks are generally divided into the categories of
"growth" or "value," although there are times when a growth fund and value fund
may own the same stock. Growth stocks are companies whose earnings growth
potential appears to the manager to be greater than the market in general and
whose revenue growth is expected to continue for an extended period. These
stocks typically pay relatively low dividends and sell at relatively high
prices. Value stocks are companies that appear to the manager to be undervalued
by the market as measured by certain financial formulas.
Investment Style: Refers to the guiding principles of a mutual fund's
investment choices. The investment style of this fund is European equity,
referring to the type of securities the managers will choose for this fund.
Market Capitalization: Market capitalization refers to the market value of a
company and is calculated by multiplying the number of shares outstanding by
the current price per share.
Morgan Stanley Capital International (MSCI) Europe Index: An unmanaged index
comprised of a sample of companies representative of the market structure of
the following European countries: Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom.
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by European companies. The fund normally invests at least 65%
of its total assets in the equity securities issued by these companies and
normally invests at least 80% of its total assets in equity securities. For
purposes of these investment strategies, the fund manager will determine
whether a company is a European company by examining where its principal
activities are located, its country of organization, the principal trading
market for its stock, the primary source of its revenues and the location of
its assets. The fund also invests in multinational companies and companies that
benefit from European economic activity. The fund primarily buys common stock
but also can invest in preferred stock and securities convertible into common
and preferred stock.
The fund manager generally invests in stocks of European companies with market
capitalizations of at least $1 billion. The fund manager will use the MSCI
Europe Index as a benchmark and seeks to invest in stocks and market sectors
represented in that index. The manager may also invest in stocks outside the
index which meet the manager's investment criteria. The fund invests mainly in
stocks listed on European stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three European countries.
The fund manager seeks to achieve consistent and sustainable performance
through various market cycles by emphasizing stock selection. Stock selection
is determined by looking at companies using a range of valuation criteria,
including the strength of their management and business franchise. The fund
manager will invest primarily in "growth" stocks; however, he may take
advantage of opportunities in "value" stocks at appropriate points in the
market or economic cycle. The manager will also consider factors such as
prospects for relative economic growth among certain European countries,
expected levels of inflation,
2
<PAGE>
government policies influencing business conditions and outlook for currency
relationships.
The fund generally will sell a stock when, in the fund manager's opinion, there
is a deterioration in the company's fundamentals, the company fails to meet
performance expectations, the stock achieves a target price, the underlying
market is overvalued or the stock's relative price momentum
declines meaningfully.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gain from the market upswing, thus reducing the fund's opportunity to achieve
its investment objective. The fund may also hold these securities pending
investments or when it expects to need cash to pay redeeming shareholders.
The fund manager may, when consistent with the fund's investment objective, use
options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending investment
or for speculation to increase returns. The fund may also use forward foreign
currency exchange contracts (obligations to buy or sell a currency at a set
rate in the future) to hedge against movements in the value of foreign
currencies.
The fund may lend some of its securities on a short-term basis in order to earn
extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or interest paid by foreign securities,
or the value of the securities themselves, may fall if currency exchange rates
change), the risk
3
<PAGE>
that a security's value will be hurt by changes in foreign political or social
conditions, the possibility of heavy taxation or expropriation and more
difficulty obtaining information on foreign securities or companies. In
addition, a portfolio of foreign securities may be harder to sell and may be
subject to wider price movements than comparable investments in U.S.
companies. There is less government regulation of foreign securities markets.
On January 1, 1999, eleven European countries implemented a new currency unit
called the "Euro" which is expected to replace the existing national
currencies of these countries by July 1, 2002. Full implementation of the Euro
may be delayed and difficulties with the conversion may significantly impact
European capital markets, resulting in increased volatility in European and
world markets. Individual issuers may suffer substantial losses if they or
their suppliers are not adequately prepared for the transition, which could
hurt the value of shares of the fund.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more
broadly diversified mutual funds.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the
fund held the securities of larger, more established companies.
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
While the fund manager chooses stocks he believes have above-average earnings
growth potential, there is no guarantee that the shares will increase in
value.
4
<PAGE>
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other funds
investing primarily in domestic securities because the costs attributable to
investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional collateral
if the value of the securities go up while they are on loan. There is also the
risk of delay in recovering the loaned securities and of losing rights to the
collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction costs
to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as ordinary
income.
When you invest in this fund you are not making a bank deposit. Your investment
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
5
<PAGE>
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
Service Fees: Fees that
are paid to BlackRock
and /or its affiliates
for shareholder account
service and
maintenance.
Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets.
The table below describes the fees and expenses that you may pay if you buy
and hold Service Shares of the fund.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<S> <C>
Advisory Fees %
Distribution and service (12b-1) fees %
Other expenses/1/ %
Total annual fund operating expenses %
Fee waivers and expense reimbursements* %
Net Expenses* %
</TABLE>
* BlackRock has contractually agreed to waive or reimburse fees or expenses
in order to limit fund expenses to % of average daily net assets until
June , 2001. The fund may have to repay some of these waivers and
reimbursements to BlackRock in the following two years. See the
"Management" section on page 13 for a discussion of these waivers and
reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Service Shares $ $
</TABLE>
Fund Management
Albert Morillo, Managing Director and head of European equities at BlackRock
International, Ltd. (BIL) will lead the investment team comprised of several
investment analysts specializing in the European markets. Prior to joining BIL
in 2000, Mr. Morillo was an investment director of Scottish Widows Investment
Management, head of its European equity team, and a member of the Investment
Policy Group. Mr. Morillo earned a BSc degree in chemical engineering and an
MBA degree at Edinburgh University. He is a member of the International Board
of the Paris Stock Exchange. Mr. Morillo has co-managed the fund since its
inception.
Kenneth Anderson serves as co-manager of the fund. Prior to joining BIL in
2000, Mr. Anderson was an investment director and the deputy head of the
Scottish Widows Investment Management European equity team. He joined the
European team in 1991 and was appointed investment director in 1995. Mr.
Anderson earned BA and MPhil degrees in economics at Strathclyde and Cambridge
Universities. Mr. Anderson has co-managed the fund since its inception.
6
<PAGE>
BlackRock
[GRAPHIC] Asia Pacific Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Earnings Growth: The
rate of growth in a
company's earnings per
share from period to
period. Security
analysts attempt to
identify companies with
earnings growth
potential because a
pattern of earnings
growth generally causes
share prices to
increase.
Equity Security: A
security, such as
stock, representing
ownership of a company.
Bonds, in comparison,
are referred to as
fixed income or debt
securities because they
represent indebtedness
to the bondholders, not
ownership.
Investment Style:
Refers to the guiding
principles of a mutual
fund's investment
choices. The investment
style of this fund is
Asia Pacific equity,
referring to the type
of securities the
managers will choose
for this fund.
Market Capitalization:
Market capitalization
refers to the market
value of a company and
is calculated by
multiplying the number
of shares outstanding
by the current price
per share.
Morgan Stanley Capital
International (MSCI)
All Country Asia
Pacific Index: An
unmanaged index
comprised of a sample
of companies
representative of the
market structure of the
following Asia Pacific
region countries:
Australia, China, Hong
Kong, India, Indonesia,
Japan, Korea, Malaysia,
New Zealand, Pakistan,
the Philippines,
Singapore, Sri Lanka,
Taiwan and Thailand.
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by Asia Pacific region companies. The fund normally invests
at least 65% of its total assets in the equity securities issued by these
companies and normally invests at least 80% of its total assets in equity
securities. For purposes of these investment strategies, the fund manager will
determine whether a company is an Asia Pacific region company by examining
where its principal activities are located, its country of organization, the
principal trading market for its stock, the primary source of its revenues and
the location of its assets. The fund invests primarily, but not exclusively, in
companies that benefit from Asia Pacific region economic activity. The fund
primarily buys common stock but also can invest in preferred stock and
securities convertible into common and preferred stock.
The fund manager generally invests in stocks of Asia Pacific region companies
with market capitalizations of at least $500 million whose earnings, the fund
manager believes, are in a strong growth trend or are undervalued. The fund
manager will use the MSCI All Country Asia Pacific Index as a benchmark and
seeks to invest in stocks and market sectors represented in that index. The
manager may also invest in stocks outside the index which meet the manager's
investment criteria. The fund invests mainly in stocks listed on Asia Pacific
region stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three Asia Pacific region countries.
The fund manager seeks to achieve consistent and sustainable performance by
managing risk and by taking advantage of market inefficiencies through a long
term, disciplined and objective investment process. Economic, statistical and
valuation data is analyzed to screen and rank securities. Major sector
7
<PAGE>
and country/regional themes, prevailing economic cycles and well-defined risk
parameters are also considered in the portfolio construction process.
The fund generally will sell a stock when it reaches a target price, which is
when the manager believes it is fully valued or when, in the manager's
opinion, conditions change such that the risk of continuing to hold the stock
is unacceptable when compared to its growth potential.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the
potential gain from the market upswing, thus reducing the fund's opportunity
to achieve its investment objective. The fund may also hold these securities
pending investments or when it expects to need cash to pay redeeming
shareholders.
The fund manager may, when consistent with the fund's investment objective,
use options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending
investment or for speculation to increase returns. The fund may also use
forward foreign currency exchange contracts (obligations to buy or sell a
currency at a set rate in the future) to hedge against movements in the value
of foreign currencies.
The fund may lend some of its securities on a short-term basis in order to
earn extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or
8
<PAGE>
interest paid by foreign securities, or the value of the securities themselves,
may fall if currency exchange rates change), the risk that a security's value
will be hurt by changes in foreign political or social conditions, the
possibility of heavy taxation or expropriation and more difficulty obtaining
information on foreign securities or companies. In addition, a portfolio of
foreign securities may be harder to sell and may be subject to wider price
movements than comparable investments in U.S. companies. There is less
government regulation of foreign securities markets.
In addition, political and economic structures in emerging market countries may
be undergoing rapid change and these countries may lack the social, political
and economic stability of more developed countries. As a result some of the
risks described above, including the risks of nationalization or expropriation
of assets and the existence of smaller, more volatile and less regulated
markets, may be increased. The value of many investments in emerging market
countries has dropped significantly due to economic and political turmoil in
the past, and may do so again in the future.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more broadly
diversified mutual funds. At times, the markets in certain Asia Pacific region
countries have suffered significant downturns and volatility. Increased social
or political unrest in some or all of these countries could cause further
economic and market uncertainty.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the fund
held the securities of larger, more established companies.
9
<PAGE>
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
While the fund manager chooses stocks he believes have above-average earnings
growth potential, there is no guarantee that the shares will increase in
value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other
funds investing primarily in domestic securities because the costs
attributable to investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional
collateral if the value of the securities go up while they are on loan. There
is also the risk of delay in recovering the loaned securities and of losing
rights to the collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction
costs to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as
ordinary income.
When you invest in this fund you are not making a bank deposit. Your
investment is not insured or guaranteed by the Federal Deposit Insurance
Corporation or by any bank or governmental agency.
10
<PAGE>
Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets.
The table below describes the fees and expenses that you may pay if you buy and
hold Service Shares of the fund.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<S> <C>
Advisory Fees %
Distribution and service (12b-1) fees %
Other expenses/1/ %
Total annual fund operating expenses %
Fee waivers and expense reimbursements* %
Net Expenses* %
</TABLE>
* BlackRock has contractually agreed to waive or reimburse fees or expenses in
order to limit fund expenses to % of average daily net assets until June
, 2001. The fund may have to repay some of these waivers and reimbursements
to BlackRock in the following two years. See the "Management" section on
page 13 for a discussion of these waivers and reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Service Shares $ $
</TABLE>
Fund Management
The fund is managed by a team of professionals at BlackRock International, Ltd
(BIL), including the following individuals who have day-to-day responsibility:
Nigel Barry, Managing Director and portfolio manager of BIL since 1996, William
Low, Director and investment manager of BIL since 1996, Donald Gilfillan,
Director and investment manager of BIL since 1996 and Alistair Veitch, Vice
President and investment manager of BIL since 1998. Mr. Barry is the lead
manager for the fund. Mr. Low has primary responsibility for the developed and
emerging equity markets of Asia. Mr. Gilfillan is responsible for Japanese
equity research and portfolio management and Mr. Veitch is responsible for
selected Asian equity markets, both developed and emerging. Prior to joining
BIL, Nigel Barry was Director and head of the Pacific Basin desk at Dunedin
Fund Managers Ltd. Messrs. Barry, Low, Gilfillan and Veitch have co-managed the
fund since its inception.
Expenses
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
Service Fees: Fees that
are paid to BlackRock
and /or its affiliates
for shareholder account
service and
maintenance.
11
<PAGE>
[GRAPHIC] About Your Investment
- --------------------------------------------------------------------------------
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Buying Shares
Service Shares are offered without a sales charge to financial institutions
(such as banks and brokerage firms) acting on behalf of their customers,
certain persons who were shareholders of the Compass Capital Group of Funds at
the time of its combination with The PNC(R) Fund in 1996 and investors that
participate in the Capital Directions SM asset allocation program. Service
Shares will normally be held by institutions or in the name of nominees of
institutions on behalf of their customers. Service Shares are normally
purchased through a customer's account at an institution through procedures
established by the institution. In these cases, confirmation of share purchases
and redemptions will be sent to the institutions. A customer's ownership of
shares will be recorded by the institution and reflected in the account
statements provided by the institutions to their customers. Investors wishing
to purchase Service Shares should contract their institutions.
Purchase orders may be placed through PFPC, the Company's transfer agent, by
calling (800) 441-7450.
- --------------------------------------------------------------------------------
What Price Per Share
Will You Pay?
The price of mutual fund shares generally changes every business day. A mutual
fund is a pool of investors' money that is used to purchase a portfolio of
securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $50 million and has 5 million shares outstanding, the net asset value
(NAV) per share is $10.
The funds' investments are valued based on market value, or where market
quotations are not readily available, based on fair value as determined in good
faith by or under the direction of the Company's Board of Trustees. Under some
circumstances certain short-term debt securities will be valued using the
amortized cost method.
Since the NAV changes daily, the price you pay for your shares depends on the
time that your order is received by the BlackRock Funds' transfer agent, whose
job it is to keep track of shareholder records.
Purchase orders received by the transfer agent before the close of regular
trading on the New York Stock Exchange (NYSE) (currently 4 p.m. (Eastern time)
on each day the NYSE is open
12
<PAGE>
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will be priced based on the NAV calculated at the close of trading on that day
plus any applicable sales charge. NAV is calculated separately for each class
of shares of each fund at 4 p.m. (Eastern time) each day the NYSE is open.
Shares will not be priced on days the NYSE is closed. Purchase orders received
after the close of trading will be priced based on the next calculation of
NAV. Foreign securities and certain other securities held by the funds may
trade on days when the NYSE is closed. In these cases, net asset value of
shares may change when fund shares cannot be bought or sold.
- -------------------------------------------------------------------------------
Paying for Shares
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available by 4 p.m. (Eastern time) on the first business day
following PFPC's receipt of the order. Payment may also, at the discretion of
the Company, be made in the form of securities that are permissible
investments for the fund.
- -------------------------------------------------------------------------------
How Much is the
Minimum Investment
The minimum investment for the initial purchase of Service Shares is $5,000;
however, institutions may set a higher minimum for their customers. There is
no minimum requirement for later investments. The Company does not accept
third party checks as payment for shares.
The Company may reject any purchase order, modify or waive the minimum initial
or subsequent investment requirements and suspend and resume the sale of any
share class of any fund at any time.
- -------------------------------------------------------------------------------
Distribution and
Service Plan
The Company has adopted a plan under Rule 12b-1 of the Investment Company Act
of 1940 (the Plan) that allows the Company to pay distribution and other fees
for the sale of its shares and for certain services provided to its
shareholders. The Company does not make distribution payments under the Plan
with respect to Service Shares.
Under the Plan, the Company may enter into arrangements with brokers, dealers,
financial institutions and industry professionals (Service Organizations)
(including PNC Bank and its affiliates).
n
13
<PAGE>
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Under these arrangements, Service Organizations will provide certain support
services to their customers who own Service Shares. The Company may pay a
shareholder servicing fee of up to .15% per year of the average daily net asset
value of Service Shares owned by each Service Organization's customers.
In return for that fee, Service Organizations may provide one or more of the
following services:
(1) Responding to customer questions on the services performed by the
Service Organization and investments in Service Shares;
(2) Assisting customers in choosing and changing dividend options,
account designations and addresses; and
(3) Providing other similar shareholder liaison services.
For a separate shareholder processing fee of up to .15% per year of the average
daily net asset value of Service Shares owned by each Service Organization's
customers, Service Organizations may provide one or more of these additional
services:
(1) Processing purchase and redemption requests from customers and
placing orders with the Company's transfer agent or the Company's
distributor;
(2) Processing dividend payments from the Company on behalf of customers;
(3) Providing sub-accounting for Service Shares beneficially owned by
customers or the information necessary for sub-accounting; and
(4) Providing other similar services.
The shareholder servicing fees and shareholder processing fees payable pursuant
to the Plan are fees payable for the administration and servicing of
shareholder accounts and not costs which are primarily intended to result in
the sale of the fund's shares.
Because the fees paid by the Company under the Plan are paid out of Company
assets on an on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
14
<PAGE>
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Selling Shares
Customers of institutions may redeem Service Shares in accordance with the
procedures applicable to their accounts with the institutions. These procedures
will vary according to the type of account and the institution involved and
customers should consult their account managers in this regard. Institutions
are responsible for transmitting redemption orders to PFPC and crediting their
customers' accounts with redemption proceeds on a timely basis. In the case of
shareholders holding share certificates the certificates must accompany the
redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Company, the administrators and the
distributor will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Company and its service providers
will not be liable for any loss; liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine in accordance
with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4 p.m. (Eastern time) on a business day is normally made in Federal
funds wired to the redeeming institution on the next business day, provided
that the funds' custodian is also open for business. Payment for redemption
orders received after 4 p.m. (Eastern time) or on a day when the funds'
custodian is closed is normally wired in Federal funds on the next business day
following redemption on which the funds' custodian is open for business. The
Company reserves the right to wire redemption proceeds within seven days after
receiving a redemption order if, in the judgement of BlackRock Advisors, Inc.,
an earlier payment could adversely affect the funds. No charge for wiring
redemption payments is imposed by the Company, although institutions may charge
their customer accounts for redemption services. Information relating to such
redemption services and charges, if any, should be obtained by customers from
their institutions.
Persons who were shareholders of the Compass Capital Group of Funds at the time
of its combination with the PNC(R) Fund may redeem for cash some or all of
their shares of the fund at any time by sending a written redemption request in
proper form
15
<PAGE>
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- --------------------------------------------------------------------------------
to BlackRock Funds, c/o PFPC Inc., P.O. Box 8950, Wilmington, DE 19899-8950.
They may also redeem shares by telephone if they have signed up for the
expedited redemption privilege.
During periods of substantial economic market change telephone redemptions may
be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8950, Wilmington, DE 19899-8950.
The Company is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Company does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the
shareholder's bank. To change the name of the single, designated bank account
to receive wire redemption proceeds, it is necessary to send a written request
to BlackRock Funds c/o PFPC, P.O. Box 8950, Wilmington, DE 19899-8950.
The Company may refuse a telephone redemption request if it believes it is
advisable to do so and may use reasonable procedures to make sure telephone
instructions are genuine.
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio combination with The PNC(R) Fund
may also purchase and redeem Service Shares of the same fund and for the same
account in which they held shares on that date through the procedures described
in this section.
If a shareholder acquiring Service Shares on or after May 1, 1998 (other than a
former shareholder of The Compass Capital Group) no longer meets the
eligibility standards for purchasing Service Shares, then the shareholder's
Service Shares will be converted to Investor A Shares of the same fund having
the same total net asset value as the shares converted. Investor A Shares are
currently authorized to bear additional service and distribution fees at the
total annual rate of .20% of average daily net assets. If a shareholder
acquiring Service Shares on or after May 1, 1998 later becomes eligible to
purchase Institutional Shares (other than due to changes in market value), then
the shareholder's Service Shares will be converted to Institutional Shares of
the same fund having the same total net asset value as the shares converted.
16
<PAGE>
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The Company's
Rights
The Company may:
.Suspend the right of redemption if trading is halted or restricted on
the NYSE or under other emergency conditions
.Postpone date of payment upon redemption if trading is halted or
restricted on the NYSE or under other emergency conditions or as
described in the section "Selling Shares" above
.Redeem shares involuntarily in certain cases, such as when the value of
a shareholder account falls below a specified level, as described below
.Redeem shares for property other than cash if conditions exist which
make cash payments undesirable
in accordance with its rights under the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
Accounts with Low
Balances
The Company may redeem a shareholder's account in a fund at any time the net
asset value of the account in such fund falls below $5,000 as the result of a
redemption. The shareholder will be notified in writing that the value of the
account is less than the required amount and the shareholder will be allowed 30
days to make additional investments before the redemption is processed. If a
customer has agreed with an institution to maintain a minimum balance in his or
her account, and the balance in the account falls below the minimum, the
customer may be obligated to redeem all or part of his or her shares in the
fund to the extent necessary to maintain the minimum balance required.
17
<PAGE>
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Market Timing
The funds are not designed for market timing organizations or other entities
using programmed or frequent purchases or redemptions. The Company reserves the
right to reject any specific purchase order, including an order made by a
market timer.
Management
BlackRock Funds' Adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was
organized in 1994 to perform advisory services for investment companies and is
located at 345 Park Avenue, New York, NY 10154. BlackRock is a wholly-owned
subsidiary of BlackRock, Inc., one of the largest publicly traded investment
management firms in the United States with $164.5 billion of assets under
management as of December 31, 1999. BlackRock, Inc. is a majority-owned
subsidiary of PNC Bank Corp., one of the largest diversified financial services
companies in the United States. BlackRock International, Ltd., (BIL), an
affiliate of BlackRock located at 7 Castle Street, Edinburgh, Scotland EH2 3AH,
acts as sub-adviser to the funds.
For their investment advisory and sub-advisory services, BlackRock and BIL are
entitled to fees computed daily and payable monthly. The maximum annual
advisory fee that can be paid to BlackRock (as a percentage of average daily
net assets) is as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT
ASSETS ADVISORY FEE
<S> <C>
First $1 billion
$1 billion-$2 billion
$2 billion-$3 billion
more than $3 billion
</TABLE>
As discussed above, BlackRock has agreed to cap each fund's net expenses at the
levels shown in the fund's expense table.
To achieve this cap, BlackRock and the Company have entered into an expense
limitation agreement. The agreement sets a limit on certain of the operating
expenses of each fund through June , 2001 and requires BlackRock to waive or
reimburse fees or expenses if these operating expenses exceed that limit. The
expense limit (which applies to expenses charged on fund assets as a whole, but
not expenses separately charged to the different share classes of the fund) as
a percentage of average daily net assets is % for the European Equity
Portfolio and % for the Asia Pacific Equity Portfolio.
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Adviser: The Adviser of
a mutual fund is
responsible for the
overall investment
management of the Fund.
The Adviser for
BlackRock Funds is
BlackRock Advisors,
Inc.
Sub-Adviser: The sub-
adviser of the fund is
responsible for its
day-to-day management
and will generally make
all buy and sell
decisions. The sub-
adviser also provides
research and credit
analysis. The sub-
adviser for the funds
is BlackRock
International Ltd.
18
<PAGE>
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If within two years following a waiver or reimbursement the operating expenses
of a fund are less than the expense limit for the fund, the fund is required to
repay BlackRock up to the amount of fees waived or expenses reimbursed under
the agreement if: (1) the fund has more than $50 million in assets, (2)
BlackRock continues to be the fund's investment adviser and (3) the Board of
Trustees of the Company has approved the payments to BlackRock on a quarterly
basis.
- --------------------------------------------------------------------------------
Dividends and
Distributions
BlackRock Funds makes two kinds of distributions to shareholders: dividends and
net capital gain.
Dividends are the net investment income derived by a fund and are paid within
10 days after the end of each quarter. The Company's Board of Trustees may
change the timing of dividend payments.
Net capital gain occurs when a fund manager sells securities at a profit. Net
capital gain (if any) is distributed to shareholders at least annually at a
date determined by the Company's Board of Trustees.
Your distributions will be reinvested at net asset value in new shares of the
same class of the fund unless you instruct PFPC in writing to pay them in cash.
There are no sales charges on these reinvestments.
19
<PAGE>
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Taxation of
Distributions
Distributions paid out of a fund's "net capital gain" will be taxed to
shareholders as long-term capital gains, regardless of how long a shareholder
has owned shares. All other distributions will be taxed to shareholders as
ordinary income.
Your annual tax statement from the Company will present in detail the tax
status of your distributions for each year.
If more than half of the total asset value of a fund is invested in foreign
stock or securities, the fund may elect to "pass through" to its shareholders
the amount of foreign taxes paid. In such case, each shareholders would be
required to include his proportionate share of such taxes in his income and may
be entitled to deduct or credit such taxes when computing his taxable income.
Distributions paid by a fund with respect to certain qualifying dividends
received by the fund from domestic corporations may be eligible for the
corporate dividends received deduction.
Because every investor has an individual tax situation, and also because the
tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares
of the Company.
20
<PAGE>
For more information:
This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the BlackRock Funds is available free, upon request, including:
Annual/Semi-Annual Reports
These reports contain additional information about the funds' investments. The
annual report describes the funds' performance, lists portfolio holdings and
discusses recent market conditions, economic trends and fund investment
strategies that significantly affected the funds' performance for the last
fiscal year.
Statement of Additional Information (SAI)
A Statement of Additional Information dated June --, 2000 has been filed with
the Securities and Exchange Commission (SEC). The SAI, which includes additional
information about the BlackRock Funds, may be obtained free of charge, along
with the Company's annual and semi-annual reports, by calling (800) 441-7450.
The SAI, as supplemented from time to time, is incorporated by reference into
this prospectus.
Shareholder Account Service Representatives
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 8:30 a.m.
to 5:30 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7450
Purchases and Redemptions
Call your registered representative or (800) 441-7450.
World Wide Web
Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com
Email
Request prospectuses, SAI, Annual or Semi-Annual Reports and literature. Forward
mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected]
Written Correspondence
Post Office Address: BlackRock Funds c/o PFPC Inc., P.O. Box 8950,
Wilmington, DE 19899-8950
Street Address: BlackRock Funds, c/o PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809
Internal Wholesalers/Broker Dealer Support
Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call (888) 8BLACKROCK
Securities and Exchange Commission (SEC)
You may also view and copy information about the BlackRock Funds, including the
SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or
the SEC's Public Reference Room in Washington, D.C. Information about the
operation of the public reference room can be obtained by calling the SEC
directly at 1-202-942-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
[GRAPHIC]
[LOGO OF BLACKROCK FUNDS]
INVESTMENT COMPANY ACT FILE NO. 811-05742
<PAGE>
[GRAPHIC]
NOT FDIC- May lose value
INSURED No bank guarantee
BlackRock
European Equity
and Asia Pacific
Equity Portfolios
================================================================================
INSTITUTIONAL SHARES
BlackRock Funds(SM) (the Company) is a mutual fund
family with 39 investment portfolios.
PROSPECTUS
June __, 2000
[LOGO OF BLACKROCK FUNDS]
The securities described in this prospectus have been registered with the
Securities and Exchange Commission (SEC). The SEC, however, has not judged these
securities for their investment merit and has not determined the accuracy or
adequacy of this prospectus. Anyone who tells you otherwise is committing a
criminal offense.
<PAGE>
Table of
Contents
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
How to find
the information
you need
<TABLE>
<S> <C>
How to find the information you need........................................ 1
European Equity Portfolio................................................... 2
Asia Pacific Equity Portfolio............................................... 7
</TABLE>
About Your
Investment
<TABLE>
<S> <C>
Buying Shares.............................................................. 12
Selling Shares............................................................. 13
Dividends/Distributions/Taxes.............................................. 17
</TABLE>
<PAGE>
How to Find the
Information You Need
About BlackRock Funds
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This is the BlackRock European Equity and Asia Pacific Equity Portfolios
Prospectus. It has been written to provide you with the information you need to
make an informed decision about whether to invest in BlackRock Funds (the
Company).
This prospectus contains information on two of the 16 BlackRock Equity funds.
To save you time, the prospectus has been organized so that each fund has its
own short section. All you have to do is turn to the section for either fund.
Once you read the important facts about the fund or funds that interest you,
read the sections that tell you about buying and selling shares, certain fees
and expenses, shareholder features of the funds and your rights as a
shareholder. These sections apply to both funds.
1
<PAGE>
BlackRock
[GRAPHIC] European Equity
Portfolio
- --------------------------------------------------------------------------------
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IMPORTANT DEFINITIONS
Earnings Growth: The
rate of growth in a
company's earnings per
share from period to
period. Security
analysts attempt to
identify companies with
earnings growth
potential because a
pattern of earnings
growth generally causes
share prices to
increase.
Equity Security: A
security, such as
stock, representing
ownership of a company.
Bonds, in comparison,
are referred to as
fixed income or debt
securities because they
represent indebtedness
to the bondholders, not
ownership.
Growth Companies: All
stocks are generally
divided into the
categories of "growth"
or "value," although
there are times when a
growth fund and value
fund may own the same
stock. Growth stocks
are companies whose
earnings growth
potential appears to
the manager to be
greater than the market
in general and whose
revenue growth is
expected to continue
for an extended period.
These stocks typically
pay relatively low
dividends and sell at
relatively high prices.
Value stocks are
companies that appear
to the manager to be
undervalued by the
market as measured by
certain financial
formulas.
Investment Style:
Refers to the guiding
principles of a mutual
fund's investment
choices. The investment
style of this fund is
European equity,
referring to the type
of securities the
managers will choose
for this fund.
Market Capitalization:
Market capitalization
refers to the market
value of a company and
is calculated by
multiplying the number
of shares outstanding
by the current price
per share.
Morgan Stanley Capital
International (MSCI)
Europe Index: An
unmanaged index
comprised of a sample
of companies
representative of the
market structure of the
following European
countries: Austria,
Belgium, Denmark,
Finland, France,
Germany, Ireland,
Italy, Netherlands,
Norway, Portugal,
Spain, Sweden,
Switzerland and the
United Kingdom.
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by European companies. The fund normally invests at least 65%
of its total assets in the equity securities issued by these companies and
normally invests at least 80% of its total assets in equity securities. For
purposes of these investment strategies, the fund manager will determine
whether a company is a European company by examining where its principal
activities are located, its country of organization, the principal trading
market for its stock, the primary source of its revenues and the location of
its assets. The fund also invests in multinational companies and companies that
benefit from European economic activity. The fund primarily buys common stock
but also can invest in preferred stock and securities convertible into common
and preferred stock.
The fund manager generally invests in stocks of European companies with market
capitalizations of at least $1 billion. The fund manager will use the MSCI
Europe Index as a benchmark and seeks to invest in stocks and market sectors
represented in that index. The manager may also invest in stocks outside the
index which meet the manager's investment criteria. The fund invests mainly in
stocks listed on European stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three European countries.
The fund manager seeks to achieve consistent and sustainable performance
through various market cycles by emphasizing stock selection. Stock selection
is determined by looking at companies using a range of valuation criteria,
including the strength of their management and business franchise. The fund
manager will invest primarily in "growth" stocks; however, he may take
advantage of opportunities in "value" stocks at appropriate points in the
market or economic cycle. The manager will also consider factors such as
prospects for relative economic growth among certain European countries,
expected levels of inflation,
2
<PAGE>
government policies influencing business conditions and out-look for currency
relationships.
The fund generally will sell a stock when, in the fund manager's opinion, there
is a deterioration in the company's fundamentals, the company fails to meet
performance expectations, the stock achieves target price, the underlying
method is overvalued or the stock's relative price momentum declines meaning-
fully.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gain from the market upswing, thus reducing the fund's opportunity to achieve
its investment objective. The fund may also hold these securities pending
investments or when it expects to need cash to pay redeeming shareholders.
The fund manager may, when consistent with the fund's investment objective, use
options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending investment
or for speculation to increase returns. The fund may also use forward foreign
currency exchange contracts (obligations to buy or sell a currency at a set
rate in the future) to hedge against movements in the value of foreign
currencies.
The fund may lend some of its securities on a short-term basis in order to earn
extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or Key Risks
3
<PAGE>
interest paid by foreign securities, or the value of the securities themselves,
may fall if currency exchange rates change), the risk that a security's value
will be hurt by changes in foreign political or social conditions, the
possibility of heavy taxation or expropriation and more difficulty obtaining
information on foreign securities or companies. In addition, a portfolio of
foreign securities may be harder to sell and may be subject to wider price
movements than comparable investments in U.S. companies. There is less
government regulation of foreign securities markets.
On January 1, 1999, eleven European countries implemented a new currency unit
called the "Euro" which is expected to replace the existing national currencies
of these countries by July 1, 2002. Full implementation of the Euro may be
delayed and difficulties with the conversion may significantly impact European
capital markets, resulting in increased volatility in European and world
markets. Individual issuers may suffer substantial losses if they or their
suppliers are not adequately prepared for the transition, which could hurt the
value of shares of the fund.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more broadly
diversified mutual funds.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the fund
held the securities of larger, more established companies.
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
4
<PAGE>
While the fund manager chooses stocks he believes have above-average earnings
growth potential, there is no guarantee that the shares will increase in value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other funds
investing primarily in domestic securities because the costs attributable to
investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional collateral
if the value of the securities go up while they are on loan. There is also the
risk of delay in recovering the loaned securities and of losing rights to the
collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction costs
to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as ordinary
income.
When you invest in this fund you are not making a bank deposit. Your investment
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
5
<PAGE>
Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets.
The table below describes the fees and expenses that you may pay if you buy
and hold Institutional Shares of the fund.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<S> <C>
Advisory Fees %
Other expenses/1/ %
Total annual fund operating expenses %
Fee waivers and expense reimbursements* %
Net Expenses* %
</TABLE>
* BlackRock has contractually agreed to waive or reimburse fees or expenses
in order to limit fund expenses to % of average daily net assets until
June , 2001. The fund may have to repay some of these waivers and
reimbursements to BlackRock in the following two years. See the
"Management" section on page 10 for a discussion of these waivers and
reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Institutional Shares $ $
</TABLE>
Fund Management
Albert Morillo, Managing Director and head of European equities at BlackRock
International, Ltd. (BIL) will lead the investment team comprised of several
investment analysts specializing in the European markets. Prior to joining BIL
in 2000, Mr. Morillo was an investment director of Scottish Widows Investment
Management, head of its European equity team, and a member of the Investment
Policy Group. Mr Morillo earned a BSc degree in chemical engineering and an
MBA degree at Edinburgh University. He is a member of the International Board
of the Paris Stock Exchange. Mr. Morillo has co-managed the fund since its
inception.
Kenneth Anderson serves as co-manager of the fund. Prior to joining BIL in
2000, Mr. Anderson was an investment director and the deputy head of the
Scottish Widows Investment Management European equity team. He joined the
European team in 1991 and was appointed investment director in 1995. Mr.
Anderson earned BA and MPhil degrees in economics at Strathclyde and Cambridge
Universities. Mr. Anderson has co-managed the fund since its inception.
Expenses
and Fees
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
6
<PAGE>
BlackRock
[GRAPHIC] Asia Pacific Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Earnings Growth: The
rate of growth in a
company's earnings per
share from period to
period. Security
analysts attempt to
identify companies with
earnings growth
potential because a
pattern of earnings
growth generally causes
share prices to
increase.
Equity Security: A
security, such as
stock, representing
ownership of a company.
Bonds, in comparison,
are referred to as
fixed income or debt
securities because they
represent indebtedness
to the bondholders, not
ownership.
Investment Style:
Refers to the guiding
principles of a mutual
fund's investment
choices. The investment
style of this fund is
Asia Pacific equity,
referring to the type
of securities the
managers will choose
for this fund.
Market Capitalization:
Market capitalization
refers to the market
value of a company and
is calculated by
multiplying the number
of shares outstanding
by the current price
per share.
Morgan Stanley Capital
International (MSCI)
All Country Asia
Pacific Index: An
unmanaged index
comprised of a sample
of companies
representative of the
market structure of the
following Asia Pacific
region countries:
Australia, China, Hong
Kong, India, Indonesia,
Japan, Korea, Malaysia,
New Zealand, Pakistan,
Philippines, Singapore,
Sri Lanka, Taiwan and
Thailand.
Investment Goal
The fund seeks long-term capital appreciation.
Primary Investment Strategies
In pursuit of this goal, the fund manager invests primarily in equity
securities issued by Asia Pacific region companies. The fund normally invests
at least 65% of its total assets in the equity securities issued by these
companies and normally invests at least 80% of its total assets in equity
securities. For purposes of these investment strategies, the fund manager will
determine whether a company is an Asia Pacific region company by examining
where its principal activities are located, its country of organization, the
principal trading market for its stock, the primary source of its revenues and
the location of its assets. The fund invests primarily, but not exclusively, in
companies that benefit from Asia Pacific region economic activity. The fund
primarily buys common stock but also can invest in preferred stock and
securities convertible into common and preferred stock.
The fund manager generally invests in stocks of Asia Pacific region companies
with market capitalizations of at least $500 million whose earnings, the fund
manager believes, are in a strong growth trend or are undervalued. The fund
manager will use the MSCI All Country Asia Pacific Index as a benchmark and
seeks to invest in stocks and market sectors represented in that index. The
manager may also invest in stocks outside the index which meet the manager's
investment criteria. The fund invests mainly in stocks listed on Asia Pacific
region stock exchanges.
The manager, in an attempt to reduce portfolio risks, will diversify
investments across countries, industry groups and companies with investments
ordinarily in at least three Asia Pacific region countries.
The fund manager seeks to achieve consistent and sustainable performance by
managing risk and by taking advantage of market inefficiencies through a long
term, disciplined and objective investment process. Economic, statistical and
valuation data is analyzed to screen and rank securities. Major sector and
country/regional themes, prevailing economic cycles and well-
7
<PAGE>
defined risk parameters are also considered in the portfolio construction
process.
The fund generally will sell a stock when it reaches a target price, which is
when the manager believes it is fully valued or when, in the manager's
opinion, conditions change such that the risk of continuing to hold the stock
is unacceptable when compared to its growth potential.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the
potential gain from the market upswing, thus reducing the fund's opportunity
to achieve its investment objective. The fund may also hold these securities
pending investments or when it expects to need cash to pay redeeming
shareholders.
The fund manager may, when consistent with the fund's investment objective,
use options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending
investment or for speculation to increase returns. The fund may also use
forward foreign currency exchange contracts (obligations to buy or sell a
currency at a set rate in the future) to hedge against movements in the value
of foreign currencies.
The fund may lend some of its securities on a short-term basis in order to
earn extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Foreign securities involve risks not typically associated with investing in
U.S. securities. These risks include but are not limited to: currency risks
(the risk that the value of dividends or Key Risks
8
<PAGE>
interest paid by foreign securities, or the value of the securities themselves,
may fall if currency exchange rates change), the risk that a security's value
will be hurt by changes in foreign political or social conditions, the
possibility of heavy taxation or expropriation and more difficulty obtaining
information on foreign securities or companies. In addition, a portfolio of
foreign securities may be harder to sell and may be subject to wider price
movements than comparable investments in U.S. companies. There is less
government regulation of foreign securities markets.
In addition, political and economic structures in emerging markets countries
may be undergoing rapid change and these countries may lack the social,
political and economic stability of more developed countries. As a result some
of the risks described above, including the risks of nationalization or
expropriation of assets and the existence of smaller, more volatile and less
regulated markets, may be increased. The value of many investments in emerging
market countries has dropped significantly due to economic and political
turmoil in the past, and may do so again in the future.
The fund may, from time to time, invest more than 25% of its assets in
securities whose issuers are located in a single country. These investments
would make the fund more dependent upon the political and economic
circumstances of that country than a mutual fund that owns stocks of companies
in many countries. Furthermore, because the fund invests in issuers located in
a specific geographic region, market changes or other factors affecting that
region, including political instability and unpredictable economic conditions,
may have a particularly significant effect on the fund compared to more broadly
diversified mutual funds. At times, the markets in certain Asia Pacific region
countries have suffered significant downturns and volatility. Increased social
or political unrest in some or all of these countries could cause further
economic and market uncertainty.
The fund may invest in companies that have relatively small market
capitalizations. These organizations will normally have more limited product
lines, markets and financial resources and will be dependent upon a more
limited management group than larger capitalized companies. In addition, it is
more difficult to get information on smaller companies, which tend to be less
well known, do not have significant ownership by large investors and are
followed by relatively few securities analysts. The securities of smaller
capitalized companies are often traded in the over-the-counter markets and may
have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell the fund's investment than if the fund
held the securities of larger, more established companies.
9
<PAGE>
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles.
While the fund manager chooses stocks he believes have above-average earnings
growth potential, there is no guarantee that the shares will increase in
value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period. Forward foreign
currency exchange contracts do not eliminate movements in the value of foreign
securities but rather allow the fund to establish a fixed rate of exchange for
a future point in time. This strategy can have the effect of reducing returns
and minimizing opportunities for gain.
The expenses of the fund can be expected to be higher than those of other
funds investing primarily in domestic securities because the costs
attributable to investing abroad are usually higher.
Securities loans involve the risk of a delay in receiving additional
collateral if the value of the securities go up while they are on loan. There
is also the risk of delay in recovering the loaned securities and of losing
rights to the collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction
costs to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as
ordinary income.
When you invest in this fund you are not making a bank deposit. Your
investment is not insured or guaranteed by the Federal Deposit Insurance
Corporation or by any bank or governmental agency.
Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets.
10
<PAGE>
The table below describes the fees and expenses that you may pay if you buy and
hold Institutional Shares of the fund.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<S> <C>
Advisory Fees %
Other expenses/1/ %
Total annual fund operating expenses %
Fee waivers and expense reimbursements* %
Net Expenses* %
</TABLE>
* BlackRock has contractually agreed to waive or reimburse fees or expenses in
order to limit fund expenses to % of average daily net assets until June
, 2001. The fund may have to repay some of these waivers and reimbursements
to BlackRock in the following two years. See the "Management" section on
page 10 for a discussion of these waivers and reimbursements.
/1/"Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Institutional Shares $ $
</TABLE>
Fund Management
The fund is managed by a team of professionals at BlackRock International, Ltd
(BIL), including the following individuals who have day-to-day responsibility:
Nigel Barry, Managing Director and portfolio manager of BIL since 1996, William
Low, Director and investment manager of BIL since 1996, Donald Gilfillan,
Director and investment manager of BIL since 1996 and Alistair Veitch, Vice
President and investment manager of BIL since 1998. Mr. Barry is the lead
manager for the fund. Mr. Low has primary responsibility for the developed and
emerging equity markets of Asia. Mr. Gilfillan is responsible for Japanese
equity research and portfolio management and Mr. Veitch is responsible for
selected Asian equity markets, both developed and emerging. Prior to joining
BIL, Nigel Barry was Director and head of the Pacific Basin desk at Dunedin
Fund Managers Ltd. Messrs. Barry, Low, Gilfillan and Veitch have co-managed the
fund since its inception.
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Other Expenses: Include
administration,
transfer agency,
custody, professional
fees and registration
fees.
11
<PAGE>
About Your Investment
[GRAPHIC]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Buying Shares
Institutional Shares are offered to:
.Institutional investors
.Trust departments of PNC Bank and its affiliates on behalf of clients for
whom the bank:
.acts in a fiduciary capacity (excluding participant-directed employee ben-
efit plans)
.otherwise has investment discretion or
.acts as custodian for at least $2 million in assets
.Individuals with a minimum investment of $2 million
Purchase orders may be placed through PFPC, the Company's transfer agent by
telephoning (800) 441-7450.
What Price Per Share Will You Pay?
The price of mutual fund shares generally changes every business day. A mutual
fund is a pool of investors' money that is used to purchase a portfolio of
securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $50 million and has 5 million shares outstanding, the net asset value
(NAV) per share is $10.
The funds' investments are valued based on market value, or where market
quotations are not readily available, based on fair value as determined in good
faith by or under the direction of the Company's Board of Trustees. Under some
circumstances certain short-term debt securities will be valued using the
amortized cost method.
Since the NAV changes daily, the price you pay for your shares depends on the
time that your order is received by the BlackRock Funds' transfer agent, whose
job it is to keep track of shareholder records.
Purchase orders received by the transfer agent before the close of regular
trading on the New York Stock Exchange (NYSE) (currently 4 p.m. (Eastern time))
on each day the NYSE is open will be priced based on the NAV calculated at the
close of trading on that day plus any applicable sales charge. NAV is
calculated separately for each class of shares of each fund at 4 p.m. (Eastern
time) each day the NYSE is open. Shares will not be priced on days the NYSE is
closed. Purchase orders received
- --------------------------------------------------------------------------------
12
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
after the close of trading will be priced based on the next calculation of
NAV. Foreign securities and certain other securities held by the funds may
trade on days when the NYSE is closed. In these cases, net asset value of
shares may change when fund shares cannot be bought or sold.
- -------------------------------------------------------------------------------
Paying for Shares
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available by 4 p.m. (Eastern time) on the first
business day following PFPC's receipt of the order. Payment may also, at the
discretion of the Company, be made in the form of securities that are
permissible investments for the fund.
- -------------------------------------------------------------------------------
How Much is the Minimum Investment?
The minimum investment for the initial purchase of Institutional Shares is:
.$5,000 for institutions
.$500,000 for registered investment advisers
.$2 million for individuals
There is no minimum requirement for later investments. The Company does not
accept third party checks as payment for shares.
The Company may reject any purchase order, modify or waive the minimum initial
or subsequent investment requirements and suspend and resume the sale of any
share class of any fund at any time.
- -------------------------------------------------------------------------------
Selling Shares
Shareholders may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Company, the administrators and
the distributor will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Company and its service providers
will not be liable for any loss; liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine in
accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4 p.m. (Eastern time) on a business day
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
is normally made in Federal funds wired to the redeeming shareholder on the
next business day, provided that the funds' custodian is also open for
business. Payment for redemption orders received after 4 p.m. (Eastern time) or
on a day when the funds' custodian is closed is normally wired in Federal funds
on the next business day following redemption on which the funds' custodian is
open for business. The Company reserves the right to wire redemption proceeds
within seven days after receiving a redemption order if, in the judgement of
BlackRock Advisors, Inc., an earlier payment could adversely affect the funds.
No charge for wiring redemption payments is imposed by the Company.
During periods of substantial economic market change telephone redemptions may
be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8950, Wilmington, DE 19899-8950.
The Company may refuse a telephone redemption request if it believes it is
advisable to do so.
If a shareholder acquiring Institutional Shares on or after May 1, 1998 no
longer meets the eligibility standards for purchasing Institutional Shares
(other than due to changes in market value), then the shareholder's
Institutional Shares will be converted to shares of another class of the fund
having the same total net asset value as the shares converted. If, at the time
of conversion, an institution offering Service Shares of the fund is acting on
the shareholder's behalf, then the shareholder's Institutional Shares will be
converted to Service Shares. If not, then the shareholder's Institutional
Shares will be converted to Investor A Shares. Service Shares are currently
authorized to bear additional service and processing fees at the total annual
rate of .30% of average daily net assets, while Investor A Shares are currently
authorized to bear additional service, processing and distribution fees at the
total annual rate of .50% of average daily net assets.
14
<PAGE>
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The Company's Rights
The Company may:
.Suspend the right of redemption if trading is halted or restricted on the
NYSE or under other emergency conditions
.Postpone date of payment upon redemption if trading is halted or restricted
on the NYSE or under other emergency conditions or as described in the
section "Selling Shares" above
.Redeem shares involuntarily in certain cases, such as when the value of a
shareholder account falls below a specified level, as described below
.Redeem shares for property other than cash if conditions exist which make
cash payments undesirable
in accordance with its rights under the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
Accounts with Low Balances
The Company may redeem a shareholder's account in the funds at any time the net
asset value of the account in such fund falls below $5,000 as the result of a
redemption. The shareholder will be notified in writing that the value of the
account is less than the required amount and the shareholder will be allowed 30
days to make additional investments before the redemption is processed.
- --------------------------------------------------------------------------------
Market Timing
The funds are not designed for market timing organizations or other entities
using programmed or frequent purchases or redemptions. The Company reserves the
right to reject any specific purchase order, including an order made by a
market timer.
The Company's Rights
15
<PAGE>
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Management
BlackRock Funds' Adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was
organized in 1994 to perform advisory services for investment companies and is
located at 345 Park Avenue, New York, NY 10154. BlackRock is a wholly-owned
subsidiary of BlackRock, Inc., one of the largest publicly traded investment
management firms in the United States with $164.5 billion of assets under
management as of December 31, 1999. BlackRock, Inc. is a majority-owned
subsidiary of PNC Bank Corp., one of the largest diversified financial services
companies in the United States. BlackRock International, Ltd. (BIL), an
affiliate of BlackRock located at 7 Castle Street, Edinburgh, Scotland EH2 3AH,
acts as sub-adviser to the funds.
For their investment advisory and sub-advisory services, BlackRock and BIL are
entitled to fees computed daily and payable monthly.
The maximum annual advisory fee that can be paid to BlackRock (as a percentage
of average daily net assets) is as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT
ASSETS ADVISORY FEE
<S> <C>
First $1 billion --%
$1 billion-$2 billion --%
$2 billion-$3 billion --%
more than $3 billion --%
</TABLE>
As discussed above, BlackRock has agreed to cap each fund's net expenses at the
levels shown in the fund's expense table.
To achieve this cap, BlackRock and the Company have entered into an expense
limitation agreement. The agreement sets a limit on certain of the operating
expenses of each fund through June , 2001 and requires BlackRock to waive or
reimburse fees or expenses if these operating expenses exceed that limit. The
expense limit (which applies to expenses charged on fund assets as a whole, but
not expenses separately charged to the different share classes of the fund) as
a percentage of average daily net assets is % for the European Equity
Portfolio and % for the Asia Pacific Equity Portfolio.
If within two years following a waiver or reimbursement the operating expenses
of a fund are less than the expense limit for
IMPORTANT DEFINITIONS
Adviser: The Adviser of
a mutual fund is
responsible for the
overall investment
management of the Fund.
The Adviser for
BlackRock Funds is
BlackRock Advisors,
Inc.
Sub-Adviser: The sub-
adviser of the fund is
responsible for its
day-to-day management
and will generally make
all buy and sell
decisions. The sub-
adviser also provides
research and credit
analysis. The sub-
adviser for the funds
is BlackRock
International, Ltd.
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the fund, the fund is required to repay BlackRock up to the amount of fees
waived or expenses reimbursed under the agreement if: (1) the fund has more
than $50 million in assets, (2) BlackRock continues to be the fund's investment
adviser and (3) the Board of Trustees of the Company has approved the payments
to BlackRock on a quarterly basis.
- --------------------------------------------------------------------------------
Dividends and Distributions
BlackRock Funds makes two kinds of distributions to shareholders: dividends and
net capital gain.
Dividends are the net investment income derived by a fund and are paid within
10 days after the end of each quarter. The Company's Board of Trustees may
change the timing of dividend payments.
Net capital gain occurs when a fund manager sells securities at a profit. Net
capital gain (if any) is distributed to shareholders at least annually at a
date determined by the Company's Board of Trustees.
Your distributions will be reinvested at net asset value in new shares of the
same class of the fund unless you instruct PFPC in writing to pay them in cash.
There are no sales charges on these reinvestments.
17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Taxation of Distributions
Distributions paid out of a fund's "net capital gain" will be taxed to
shareholders as long-term capital gain regardless of how long a shareholder has
owned shares. All other distributions will be taxed to shareholders as ordinary
income.
Your annual tax statement from the Company will present in detail the tax
status of your distributions for each year.
If more than half of the total asset value of a fund is invested in foreign
stock or securities, the fund may elect to "pass through" to its shareholders
the amount of foreign taxes paid. In such case each shareholder would be
required to include his proportionate share of such taxes in his income and may
be entitled to deduct or credit such taxes in computing his taxable income.
Distributions paid by a fund with respect to certain qualifying dividends
received by the fund from domestic corporations may be eligible for the
corporate dividends received deduction.
Because every investor has an individual tax situation, and also because the
tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares
of the Company.
18
<PAGE>
For more information:
This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the BlackRock Funds is available free, upon request, including:
Annual/Semi-Annual Reports
These reports contain additional information about the funds' investments. The
annual report describes the funds' performance, lists portfolio holdings and
discusses recent market conditions, economic trends and fund investment
strategies that significantly affected the funds' performance for the last
fiscal year.
Statement of Additional Information (SAI)
A Statement of Additional Information dated June --, 2000 has been filed with
the Securities and Exchange Commission (SEC). The SAI, which includes additional
information about the BlackRock Funds, may be obtained free of charge, along
with the Company's annual and semi-annual reports, by calling (800) 441-7450.
The SAI, as supplemented from time to time, is incorporated by reference into
this prospectus.
Shareholder Account Service Representatives
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 8:30 a.m.
to 5:30 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7450
Purchases and Redemptions
Call your registered representative or (800) 441-7450.
World Wide Web
Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com
Email
Request prospectuses, SAI, Annual or Semi-Annual Reports and literature. Forward
mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected]
Written Correspondence
Post Office Address: BlackRock Funds c/o PFPC Inc., P.O. Box 8950,
Wilmington, DE 19899-8950
Street Address: BlackRock Funds, c/o PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809
Internal Wholesalers/Broker Dealer Support
Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call (888) 8BLACKROCK
Securities and Exchange Commission (SEC)
You may also view and copy information about the BlackRock Funds, including the
SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or
the SEC's Public Reference Room in Washington, D.C. Information about the
operation of the public reference room can be obtained by calling the SEC
directly at 1-202-942-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
[GRAPHIC]
[LOGO OF BLACKROCK FUNDS]
INVESTMENT COMPANY ACT FILE NO. 811-05742
<PAGE>
3
BLACKROCK FUNDS(SM)
SELECT EQUITY PORTFOLIO
BLACKROCK SHARES
CROSS REFERENCE SHEET
Item Number Form N-1A, Prospectus
Part A Caption
- ------ -------
1(a) Cover Page
1(b) Back Cover Page
2 The Portfolio - Investment Goal; - Primary Investment
Strategies; - Key Risks
3 The Portfolio - Risk/Return Information; - Expenses and
Fees
4 The Portfolio - Investment Goal; - Primary Investment
Strategies; - Key Risks
5 Not Applicable
6 The Portfolio - Fund Management; - Management
7 About Your Investment - What Price Per Share Will You
Pay?; - How Much is the Minimum Investment?; - Selling
Shares; - Accounts With Low Balances; - Dividends and
Distributions; - Taxation of Distributions
8 Not Applicable
9 Not Applicable
<PAGE>
4
Item Number Form N- Statement of Additional
1A, Part B Information Caption
------ -------------------
10 Cover Page
11 Miscellaneous
12 Miscellaneous; Investment Policies; Additional
Investment Limitations
13 Trustees and Officers; Purchase and Redemption
Information
14 Trustees and Officers; Miscellaneous
15 Investment Advisory, Administration,
Distribution and Servicing Arrangements;
Purchase and Redemption Information
16 Portfolio Transactions
17 Shareholder and Trustee Liability of the Fund;
Additional Information Concerning Shares;
Miscellaneous
18 Purchase and Redemption Information; Valuation
of Portfolio Securities
19 Taxes
20 Investment Advisory, Administration,
Distribution and Servicing Arrangements
21 Performance Information
22 Financial Statements
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
[GRAPHIC]
NOT FDIC- May lose value
INSURED No bank guarantee
Select Equity Portfolio
================================================================================
BLACKROCK SHARES
BlackRock Funds(SM) (the Company) is a mutual fund
family with 39 investment portfolios.
PROSPECTUS
June __, 2000
[LOGO OF BLACKROCK FUNDS]
The securities described in this prospectus have been registered with the
Securities and Exchange Commission (SEC). The SEC, however, has not judged these
securities for their investment merit and has not determined the accuracy or
adequacy of this prospectus. Anyone who tells you otherwise is committing a
criminal offense.
<PAGE>
Table of
Contents
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
How to find the information you need
<TABLE>
<S> <C>
Select Equity Portfolio..................................................... 1
</TABLE>
About Your Investment
<TABLE>
<S> <C>
How to Buy/Sell Shares..................................................... 5
Dividends/Distributions/Taxes.............................................. 10
</TABLE>
<PAGE>
BlackRock
[GRAPHIC] Select Equity
Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Goal
The fund seeks long-term capital appreciation--current income is the secondary
objective.
Primary Investment Strategies
In pursuit of this goal, the fund manger uses the S&P 500 Index as a benchmark
and seeks to invest in stocks and market sectors in similar proportion to that
index. The manager seeks to own securities in all sectors, but can overweight
or underweight securities within sectors as he identifies market opportunities.
The fund normally invests at least 80% of its total assets in equity
securities. The fund primarily buys common stock but can also invest in
preferred stock and securities convertible into common and preferred stock.
The manager initially screens for "value" and "growth" stocks from the universe
of companies with market capitalization above $1 billion. Whether screening
growth or value stocks, the manager is seeking companies that are currently
undervalued. The manager uses fundamental analysis to examine each company for
financial strength before deciding to purchase the stock.
The fund generally will sell a stock when it reaches a target price, which is
when the manager believes it is fully valued or when, in the manager's opinion,
conditions change such that the risk of continuing to hold the stock is
unacceptable when compared to its growth potential.
It is possible that in extreme market conditions the fund may invest some or
all of its assets in high quality money market securities. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gain from the market upswing, thus reducing the fund's opportunity to achieve
its investment objective. The fund may also hold these securities pending
investments or when it expects to need cash to pay redeeming shareholders.
The fund manager may, when consistent with the fund's investment objective, use
options or futures (commonly known as derivatives). The primary purpose of
using derivatives is to attempt to reduce risk to the fund as a whole (hedge)
but they may also be used to maintain liquidity, commit cash pending investment
or for speculation to increase returns.
IMPORTANT DEFINITIONS
Equity Security: A
security, such as
stock, representing
ownership of a company.
Bonds, in comparison,
are referred to as
fixed income or debt
securities because they
represent indebtedness
to the bondholders, not
ownership.
Fundamental Analysis: A
method of stock market
analysis that
concentrates on
"fundamental"
information about the
company such (as its
income statement,
balance sheet, earnings
and sales history,
products and
management) to attempt
to forecast future
stock value.
Investment Style:
Refers to the guiding
principles of a mutual
fund's investment
choices. The investment
style of this fund is a
blend of growth stocks
and value stocks,
referring to the type
of securities the
managers will choose
for this fund.
Market Capitalization:
Refers to the market
value of the company
and is calculated by
multiplying the number
of shares outstanding
by the current price
per share.
Sector: All stocks are
classified into a
category or sector such
as utilities, consumer
services, basic
materials, capital
equipment, consumer
cyclicals, energy,
consumer non-cyclicals,
healthcare, technology,
transportation, finance
and cash.
S&P 500 Index: The
Standard & Poor's
Composite Stock Price
Index, an unmanaged
index of 500 stocks,
most of which are
listed on the New York
Stock Exchange. The
index is heavily
weighted toward stocks
with large market
capitalization and
represents
approximately two-
thirds of the total
market value of all
domestic common stocks.
Value and Growth
Companies: All stocks
are generally divided
into the categories of
"growth" or "value,"
although there are
times when a growth
fund and value fund may
own the same stock.
Value stocks are
companies that appear
to the manager to be
undervalued by the
market as measured by
certain financial
formulas. Growth stocks
are companies whose
earnings growth
potential appears to
the manager to be
greater than the market
in general, and whose
growth in revenue is
expected to continue
for an extended period.
1
<PAGE>
The fund may lend some of its securities on a short-term basis in order to earn
extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.
The fund may engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
Key Risks
Key Risks
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market
conditions, which means you could lose money.
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds
with different investment styles. For example, in some markets a fund holding
small cap stocks may outperform this fund.
While the fund manager chooses stocks he believes to be under-valued, or which
have above average growth potential, there is no guarantee that prices will
increase in value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short time period.
Securities loans involve the risk of a delay in receiving additional collateral
if the value of the securities go up while they are on loan. There is also the
risk of delay in recovering the loaned securities and of losing rights to the
collateral if a borrower goes bankrupt.
Higher than normal portfolio turnover may result in increased transaction costs
to the fund, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of fund securities may result in the recognition of
capital gain or loss. Given the frequency of sales, such gain or loss will
likely be short-term capital gain or loss. Unlike long-term capital gain,
short-term capital gain of individuals is taxable at the same rates as ordinary
income.
When you invest in this fund you are not making a bank deposit. Your investment
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
2
<PAGE>
Risk / Return Information
Since BlackRock Shares of the fund have only been introduced as of the date of
this prospectus, the chart and table below give you a picture of the fund's
long-term performance for Institutional Shares of the fund. Although the chart
and table show returns for the Institutional Shares which are not offered in
this prospectus, the Institutional Shares would have substantially similar
annual returns as the BlackRock Shares offered in this prospectus because the
Institutional Shares and the BlackRock Shares are invested in the same
portfolio of securities and the annual returns would differ only to the extent
that the Institutional Shares and the BlackRock Shares do not have the same
expenses. The information shows you how the fund's performance has varied year
by year and provides some indication of the risks of investing in the fund. The
table compares the fund's performance to that of the S&P 500 Index, a
recognized unmanaged index of stock market performance. As with all such
investments, past performance is not an indication of future results.
As of 12/31
- -------------------------------------------------------------------------------
- -
ANNUAL TOTAL RETURNS**
- -------------------------------------------------------------------------------
- -
[GRAPH]
1994 -1.26
1995 33.3
1996 23.72
1997 31.46
1998 24.61
1999 20.77
Best Quarter
Q4 '98: 20.85%
Worst Quarter
Q3 '98: -11.35%
As of 12/31/99
- -------------------------------------------------------------------------------
- -
AVERAGE ANNUAL TOTAL RETURNS**
- -------------------------------------------------------------------------------
- -
Since Inception
1 Year 3 Years 5 Years Inception Date
- -------------------------------------------------------------------------------
- -
Select 20.77% 25.54% 26.68% 20.62% 09/13/93
S&P 500 21.145 27.66% 28.66% 22.57% N/A*
* For comparative purposes, the value of the index on 09/01/93 is used as the
beginning value on 09/15/93.
** The chart and the table both assume reinvestment of dividends and
distributions.
3
<PAGE>
Expenses and Fees
Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets.
The table below describes the fees and expenses that you may pay if you buy
and hold Institutional Shares of the fund. The table is based on expenses for
the most recent fiscal year.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
<TABLE>
<S> <C>
Advisory fees
Other expenses(/1/)
Total annual fund operating expenses
Fee waivers and expense reimbursements
Net expenses*
</TABLE>
* BlackRock has contractually agreed to waive or reimburse fees or expenses
in order to limit fund expenses to % of average daily net assets until
May 1, 2001. The fund may have to repay some of these waivers and
reimbursements to BlackRock in the following two years. See the
"Management" section on page for a discussion of these waivers and
reimbursements.
(1) "Other expenses" are based on estimated amounts for the current fiscal
year.
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Institutional Shares $ $
</TABLE>
Fund Management
The fund is co-managed by Daniel B. Eagan and R. Andrew Damm. Daniel B. Eagan
has been co-manager of the fund since January 1995. He has been a Managing
Director with BlackRock Financial Management, Inc. (BFM) since 1995. Mr. Eagan
was a director of investment strategy at BlackRock Advisors, Inc. (BAI) during
1994-1995. Prior to 1994 he served as senior research consultant for Mercer
Investment Consulting. R. Andrew Damm has been co-manager of the fund since
2000. He has been a Managing Director with BFM since 1997 and senior
investment manager with BAI since 1995. Mr. Damm was a portfolio manager for
PNC Bank from 1988 to 1995.
IMPORTANT DEFINITIONS
Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.
Other Expenses: Fees
paid by the fund for
other expenses such as
administration,
transfer agency,
custody, professional
fees and registration
fees.
4
<PAGE>
About Your Investment
[GRAPHIC]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BlackRock Shares are offered without a sales charge to institutional investors
with a minimum investment of $5,000,000.
Purchase orders may be placed through PFPC, the Company's transfer agent, by
calling (800) 441-7450.
- --------------------------------------------------------------------------------
The price of mutual fund shares generally changes every business day. A mutual
fund is a pool of investors' money that is used to purchase a portfolio of
securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $50 million and has 5 million shares outstanding, the net asset value
(NAV) per share is $10.
The fund's investments are valued based on market value, or where market
quotations are not readily available, based on fair value as determined in good
faith by or under the direction of the Company's Board of Trustees. Under some
circumstances certain short-term debt securities will be valued using the
amortized cost method.
Since the NAV changes daily, the price of your shares depends on the time that
your order is received by the BlackRock Funds' transfer agent, whose job it is
to keep track of shareholder records.
Purchase orders received by the transfer agent before the close of regular
trading on the New York Stock Exchange (NYSE) (currently 4 p.m. (Eastern time))
on each day the NYSE is open will be priced based on the NAV calculated at the
close of trading on that day. NAV is calculated separately for each class of
shares of the fund at 4 p.m. (Eastern time) each day the NYSE is open. Shares
will not be priced on days the NYSE is closed. Purchase orders received after
the close of trading will be priced based on the next calculation of NAV.
Foreign securities and certain other securities held by the fund may trade on
days when the NYSE is closed. In these cases, net asset value of shares may
change when fund shares cannot be bought or sold.
Buying Shares
What Price Per Share Will You Pay?
5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Payment for Shares
Payment for BlackRock Shares must normally be made in Federal funds or other
funds immediately available by 4 p.m. (Eastern time) on the first business day
following PFPC's receipt of the order. Payment may also, at the discretion of
the Company, be made in the form of securities that are permissible investments
for the respective fund.
How Much is the Minimum Investment?
The minimum investment for the initial purchase of BlackRock Shares is
$5,000,000. There is no minimum requirement for later investments. The fund
does not accept third party checks as payment for shares.
The fund may reject any purchase order, modify or waive the minimum initial or
subsequent investment requirements and suspend and resume the sale of any share
class of the fund at any time.
Selling Shares
Shareholders may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The fund, the administrators and the
distributor will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The fund and its service providers will
not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine in accordance
with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4 p.m. (Eastern time) on a business day is normally made in Federal
funds wired to the redeeming shareholder on the next business day, provided
that the fund's custodian is also open for business. Payment for redemption
orders received after 4 p.m. (Eastern time) or on a day when the fund's
custodian is closed is normally wired in Federal funds on the next business day
following redemption on which the fund's custodian is open for business. The
fund reserves the right to wire redemption proceeds within seven days after
receiving a redemption order if, in the judgement of BlackRock Advisors, Inc.,
an earlier payment could adversely affect the fund. No charge for wiring
redemption payments is imposed by the Company.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8950, Wilmington, DE 19899-8950.
The Company may refuse a telephone redemption request if it believes it is
advisable to do so.
- --------------------------------------------------------------------------------
The Company's Rights
The Company may:
. Suspend the right of redemption if trading is halted or restricted on
the NYSE or under other emergency conditions
. Postpone date of payment upon redemption if trading is halted or
restricted on the NYSE or under other emergency conditions or as
described in the section "Selling Shares" above
. Redeem shares involuntarily in certain cases, such as when the value of
a shareholder account falls below a specified level, as described below
. Redeem shares for property other than cash if conditions exist which
make cash payments undesirable
in accordance with its rights under the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
Market Timing
The fund is not designed for market timing organizations or other entities using
programmed or frequent purchases or redemptions. The Company reserves the right
to reject any specific purchase order, including an order made by a market
timer.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Accounts with Low Balances
The Company may redeem a shareholder's account in the fund at any time the net
asset value of the account in such fund falls below $5,000,000 as the result of
a redemption. The shareholder will be notified in writing that the value of the
account is less than the required amount and the shareholder will be allowed 30
days to make additional investments before the redemption is processed.
Management
BlackRock Funds' Adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was
organized in 1994 to perform advisory services for investment companies and is
located at 345 Park Avenue, New York, NY 10154. BlackRock is a wholly-owned
subsidiary of BlackRock, Inc., one of the largest publicly traded investment
management firms in the United States with $164.5 billion of assets under
management as of December 31, 1999. BlackRock, Inc. is a majority-owned
subsidiary of PNC Bank Corp., one of the largest diversified financial services
companies in the United States. BlackRock Financial Management, Inc. (BFM), an
affiliate of BlackRock located at 345 Park Avenue, New York, New York 10154,
acts as sub-adviser to the fund.
For their investment advisory and sub-advisory services, BlackRock and BFM, as
applicable, are entitled to fees computed daily and payable monthly. For the
fiscal year ended September 30, 1999, the aggregate advisory fees paid by the
fund to BlackRock as a percentage of average daily net assets was .53%.
The maximum annual advisory fees that can be paid to BlackRock (as a percentage
of average daily net assets of the fund) are as follows:
Maximum Annual Contractual Fee Rate (Before Waivers)
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
AVG DAILY NET ASSETS FEE
<S> <C>
First $1 billion .550%
$1 billion-$2 billion .500%
$2 billion-$3 billion .475%
greater than $3 billion .450%
</TABLE>
- --------------------------------------------------------------------------------
IMPORTANT DEFINITIONS
Adviser: The Adviser of
a mutual fund is
responsible for the
overall investment
management of the Fund.
The Adviser for
BlackRock Funds is
BlackRock Advisors,
Inc.
Sub-Adviser: The sub-
adviser of a fund is
responsible for its
day-to-day management
and will generally make
all buy and sell
decisions. Sub-advisers
also provide research
and credit analysis.
The sub-adviser for the
fund is BlackRock
Financial Management,
Inc.
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Information about the portfolio manager for the fund is presented in the fund
section.
As discussed above, BlackRock has agreed to cap the fund's net expenses
(excluding interest expense) at the levels shown in the fund's expense table.
To achieve this cap, BlackRock and the Company have entered into an expense
limitation agreement. The agreement sets a limit on certain of the operating
expenses of the fund through May , 2001 and requires BlackRock to waive or
reimburse fees or expenses if these operating expenses exceed that limit. This
expense limit (which applies to expenses charged on fund assets as a whole, but
not expenses separately charged to the different share classes of the fund) as
a percentage of average daily net assets is .645%.
If within two years following a waiver or reimbursement the operating expenses
of the fund are less than the expense limit for the fund, the fund is required
to repay BlackRock up to the amount of fees waived or expenses reimbursed under
the agreement if: (1) the fund has more than $50 million in assets, (2)
BlackRock continues to be the fund's investment adviser and (3) the Board of
Trustees of the Company has approved the payments to BlackRock on a quarterly
basis.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividends and Distributions
BlackRock Funds makes two kinds of distributions to shareholders: dividends and
net capital gain.
Dividends are the net investment income derived by the fund and are paid within
10 days after the end of each quarter. The Company's Board of Trustees may
change the timing of dividend payments.
Net capital gain occurs when the fund manager sells securities at a profit. Net
capital gain (if any) is distributed to shareholders at least annually at a
date determined by the Company's Board of Trustees.
Your distributions will be reinvested at net asset value in new shares of the
same class of the fund unless you instruct PFPC in writing to pay them in cash.
There are no sales charges on these reinvestments.
Taxation of Distributions
Distributions paid out of the fund's "net capital gain" will be taxed to
shareholders as long-term capital gain, regardless of how long a shareholder
has owned shares. All other distributions other than exempt-interest dividends
will be taxed to shareholders as ordinary income.
Your annual tax statement from the Company will present in detail the tax
status of your distributions for each year.
If more than half of the total asset value of the fund is invested in foreign
securities, the fund may elect to "pass through" to its shareholders the amount
of foreign taxes paid. In such case, each shareholder would be required to
include his proportionate share of such taxes in his income and may be entitled
to deduct or credit such taxes when computing his taxable income.
Distributions paid by the fund with respect to certain qualifying dividends
received by the fund from domestic corporations may be eligible for the
corporate dividends received deduction.
Because every investor has an individual tax situation, and also because the
tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares
of the Company.
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For More Information:
This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the BlackRock Funds is available free, upon request, including:
Annual/Semi-Annual Report
These reports contain additional information about the fund's investments. The
annual report describes the fund's performance, lists portfolio holdings, and
discusses recent market conditions, economic trends and fund investment
strategies that significantly affected the fund's performance for the last
fiscal year.
Statement of Additional Information (SAI)
A Statement of Additional Information, dated June __, 2000, has been filed with
the Securities and Exchange Commission (SEC). The SAI, which includes additional
information about the BlackRock Funds, may be obtained free of charge, along
with the Company's annual and semi-annual reports, by calling (800) 441-7450.
The SAI, as supplemented from time to time, is incorporated by reference into
this Prospectus.
Shareholder Account Service Representatives
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 8:30 a.m.
to 5:30 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7450
Purchases and Redemptions
Call your registered representative or (800) 441-7450.
World Wide Web
Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com
Email
Request prospectuses, SAI, Annual or Semi-Annual Reports and literature. Forward
mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected]
Written Correspondence
Post Office Address: BlackRock Funds c/o PFPC, Inc. PO Box 8950,
Wilmington, DE 19899-8950
Street Address: BlackRock Funds, c/o PFPC, Inc. 400 Bellevue Parkway,
Wilmington, DE 19809
Internal Wholesalers/Broker Dealer Support
Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call: (888) 8BLACKROCK
Securities and Exchange Commission (SEC)
You may also view and copy information about the BlackRock Funds, including the
SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or
the SEC's Public Reference Room in Washington, D.C. Information about the
operation of the public reference room can be obtained by calling the SEC
directly at 1-202-942-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
[GRAPHIC]
[LOGO OF BLACKROCK FUNDS]
INVESTMENT COMPANY ACT FILE NO. 811-05742
<PAGE>
BLACKROCK FUNDS(SM)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary
information pertaining to shares representing interests in the European Equity
and Asia Pacific Equity Portfolios (the "Portfolios") of BlackRock FundsSM (the
"Fund"). This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Prospectuses of the Portfolios dated
June __, 2000, as amended from time to time (the "Prospectuses"). Prospectuses
of the Portfolios may be obtained from the Fund's distributor at no charge by
calling toll-free (800) 441-7379. This Statement of Additional Information is
dated June __, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT POLICIES..................................................................1
ADDITIONAL INVESTMENT LIMITATIONS....................................................8
TRUSTEES AND OFFICERS................................................................9
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND.......................................12
INVESTMENT ADVISORY, ADMINISTRATION, DISTRIBUTION AND SERVICING ARRANGEMENTS........12
EXPENSES............................................................................16
PORTFOLIO TRANSACTIONS..............................................................16
PURCHASE AND REDEMPTION INFORMATION.................................................17
VALUATION OF PORTFOLIO SECURITIES...................................................26
PERFORMANCE INFORMATION.............................................................26
TAXES...............................................................................30
ADDITIONAL INFORMATION CONCERNING SHARES............................................32
MISCELLANEOUS.......................................................................33
APPENDIX A.........................................................................A-1
APPENDIX B.........................................................................B-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or the
Prospectuses in connection with the offering made by the Prospectuses and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. The Prospectuses do not
constitute an offering by the Fund or by the Fund's distributor in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>
INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies.
Additional Information on Investment Strategy
Equity securities include common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts.
From time to time the Portfolios may invest in shares of companies through
initial public offerings (IPOs). IPOs have the potential to produce, and have in
fact produced, substantial gains. There is no assurance that the Portfolios will
have access to profitable IPOs and therefore investors should not rely on these
past gains as an indication of future performance.
Additional Information on Portfolio Investments
Foreign Investments. Investing in foreign securities involves
considerations not typically associated with investing in securities of
companies organized and operated in the United States. Because foreign
securities generally are denominated and pay dividends or interest in foreign
currencies, the value of a Portfolio that invests in foreign securities as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates.
A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect the Portfolios'
operations.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. While the volume of
transactions effected on foreign stock exchanges has increased in recent years,
it remains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
The Portfolios may invest their assets in countries with emerging economies
or securities markets. Political and economic structures in many of these
countries may be undergoing significant evolution and rapid development, and
these countries may lack the social, political and economic stability
characteristic of more developed countries. Some of these countries may have in
the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result the
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. In addition, unanticipated political or social
developments may affect the value of investments in these countries and the
availability to the Portfolios of additional investments in emerging market
countries. The small size and inexperience of the securities markets in certain
of these countries and the limited volume of trading in securities in these
countries may make investments in the countries illiquid and more volatile than
investments in Japan or most Western European countries. There may be little
financial or accounting information available with respect to issuers located in
certain emerging market countries, and it may be difficult to assess the value
or prospects of an investment in such issuers.
The expense ratio of the Portfolios can be expected to be higher than those
of Portfolios investing primarily in domestic securities. The costs attributable
to investing abroad are usually higher for several reasons, such as the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
ADRs, EDRs and GDRs. The Portfolios may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts, are
receipts issued in Europe, typically by foreign banks and trust companies, that
evidence ownership of either foreign or domestic underlying securities. GDRs are
depository receipts structured like global debt issues to facilitate trading on
an international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As
1
<PAGE>
a result, available information concerning the issuer may not be as current as
for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and
GDRs may be more volatile than if such instruments were sponsored by the issuer.
Investments in ADRs, EDRs and GDRs present additional investment considerations
as described under "Foreign Investments."
The Euro. On January 1, 1999, 11 European countries implemented a new
currency unit, the Euro, which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. The
countries that initially converted or tied their currencies to the Euro are
Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan means that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Participating governments will issue their bonds in Euros, and monetary policy
for participating countries will be uniformly managed by a new central bank, the
European Central Bank.
Although it is not possible to predict the impact of the Euro
implementation plan on the Portfolios, the transition to the Euro may change the
economic environments and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries using the Euro
as a single entity, and the Portfolios' sub-adviser may need to adapt its
investment strategy accordingly. The process of implementing the Euro also may
adversely affect financial markets world-wide and may result in changes in the
relative strength and value of the U.S. dollar or other major currencies, as
well as possible adverse tax consequences. The transition to the Euro is likely
to have a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce generally.
These resulting uncertainties could create increased volatility in financial
markets world-wide.
Foreign Currency Transactions. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow
the Portfolios to establish a rate of exchange for a future point in time. The
Portfolios may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. The Portfolios
may enter into forward foreign currency exchange contracts when deemed advisable
by its adviser or sub-adviser under two circumstances. First, when entering into
a contract for the purchase or sale of a security, the Portfolios may enter into
a forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
Second, when the Portfolios' adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolios may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolios' securities denominated
in such foreign currency. With respect to any forward foreign currency contract,
it will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer protection from losses resulting from declines in
the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. The Portfolios
will also incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
The Portfolios may also engage in proxy hedging transactions to reduce the
effect of currency fluctuations on the value of existing or anticipated holdings
of portfolio securities. Proxy hedging is often used when the currency to which
the Portfolios are exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolios' securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Portfolios if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolios are engaging in proxy hedging. The
Portfolios may also cross-hedge currencies by entering into forward contracts to
sell one or more currencies that are expected to decline in value relative to
other currencies to which the Portfolios have or in which the Portfolios expect
to have Portfolio exposure. For example, the Portfolios may hold both French
government bonds and German government bonds, and the Adviser or Sub-Adviser may
believe that French francs will deteriorate against German marks. The Portfolios
would sell French francs to reduce its exposure to that currency and buy German
marks. This strategy
2
<PAGE>
would be a hedge against a decline in the value of French francs, although it
would expose the Portfolios to declines in the value of the German mark relative
to the U.S. dollar.
In general, currency transactions are subject to risks different from those
of other portfolio transactions, and can result in greater losses to the
Portfolios than would otherwise be incurred, even when the currency transactions
are used for hedging purposes.
A separate account of a Portfolio consisting of liquid assets equal to the
amount of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above, will
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Portfolio.
Reverse Repurchase Agreements and Other Borrowings. The Portfolios are
authorized to borrow money. If the securities held by the Portfolios should
decline in value while borrowings are outstanding, the net asset value of the
Portfolios' outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolios' securities. Borrowings may
be made by the Portfolios through reverse repurchase agreements under which the
Portfolios sell portfolio securities to financial institutions such as banks and
broker-dealers and agrees to repurchase them at a particular date and price.
Such Agreements are considered to be borrowings under the Investment Company Act
of 1940 (the "1940 Act"). The Portfolios may use the proceeds of reverse
repurchase agreements to purchase other securities either maturing, or under an
agreement to resell, on a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. This use of reverse repurchase agreements may
be regarded as leveraging and, therefore, speculative. Reverse repurchase
agreements involve the risks that the interest income earned in the investment
of the proceeds will be less than the interest expense, that the market value of
the securities sold by the Portfolios may decline below the price of the
securities the Portfolios are obligated to repurchase and that the securities
may not be returned to the Portfolios. During the time a reverse repurchase
agreement is outstanding, the Portfolios will maintain a segregated account with
the Fund's custodian containing cash, U.S. Government or other appropriate
liquid securities having a value at least equal to the repurchase price. The
Portfolios' reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
Whenever borrowings exceed 5% of a Portfolios' total assets, that Portfolio will
not make any investments.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. The Portfolios may purchase bank obligations, such as
certificates of deposit, notes, bankers' acceptances and time deposits,
including instruments issued or supported by the credit of U.S. or foreign banks
or savings institutions having total assets at the time of purchase in excess of
$1 billion. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of a specific
obligation or by government regulation. The assets of a bank or savings
institution will be deemed to include the assets of its domestic and foreign
branches for purposes of the Portfolios' investment policies. Investments in
short-term bank obligations may include obligations of foreign banks and
domestic branches of foreign banks, and also foreign branches of domestic banks.
Supranational Organization Obligations. The Portfolios may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.
Lease Obligations. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the
Sub-Adviser will consider, among other factors, the following: (i) whether the
lease can be cancelled; (ii) the degree of assurance that assets represented by
the lease could be sold; (iii) the strength of the lessee's general credit
(e.g., its debt, administrative, economic, and financial characteristics); (iv)
the likelihood that the municipality would discontinue appropriating funding for
the leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative
3
<PAGE>
governmental cost burdens are allocated and reallocated among federal, state and
local governmental units. Such non-payment would result in a reduction of income
to the Portfolios, and could result in a reduction in the value of the municipal
lease experiencing non-payment and a potential decrease in the net asset value
of the Portfolios. Issuers of municipal securities might seek protection under
the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Portfolios could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and the Portfolios
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Portfolios might take possession of and manage the assets securing
the issuer's obligations on such securities, which may increase the Portfolios'
operating expenses and adversely affect the net asset value of the Portfolios.
When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and the Portfolios would not have the right to take
possession of the assets. Any income derived from the Portfolios' ownership or
operation of such assets may not be tax-exempt. In addition, the Portfolios'
intention to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended, may limit the extent to which a Portfolio may
exercise its rights by taking possession of such assets, because as a regulated
investment company the Portfolios are subject to certain limitations on its
investments and on the nature of its income.
Commercial Paper. The Portfolios may purchase commercial paper rated (at
the time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed
advisable by the Portfolios' adviser or sub-adviser, "high quality" issues rated
"A-2" or "Prime-2" by S&P or Moody's, respectively. These ratings symbols are
described in Appendix A.
Commercial paper purchasable by the Portfolios includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
Repurchase Agreements. The Portfolios may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Repurchase agreements
are, in substance, loans. Default by or bankruptcy of a seller would expose the
Portfolios to possible loss because of adverse market action, expenses and/or
delays in connection with the disposition of the underlying obligations.
The repurchase price under the repurchase agreements generally equals the
price paid by the Portfolio involved plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on securities
underlying the repurchase agreement). The financial institutions with which the
Portfolios may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the Portfolios' adviser or sub-adviser. The
Portfolios' adviser or sub-adviser will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement to equal at least the repurchase price (including accrued interest).
In addition, the Portfolios' adviser or sub-adviser will require that the value
of this collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be equal to or greater than the
repurchase price (including accrued premium) provided in the repurchase
agreement. The accrued premium is the amount specified in the repurchase
agreement or the daily amortization of the difference between the purchase price
and the repurchase price specified in the repurchase agreement. The Portfolios'
adviser or sub-adviser will mark-to-market daily the value of the securities.
Securities subject to repurchase agreements will be held by the Fund's custodian
(or sub-custodian) in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by the Portfolios under the 1940 Act.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Portfolios will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Portfolios' ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Portfolio may suffer a
loss to the extent proceeds from the sale of the underlying securities are less
than the repurchase price.
4
<PAGE>
Investment Grade Debt Obligations. The Portfolios may invest in "investment
grade securities," which are securities rated in the four highest rating
categories of an NRSRO. It should be noted that debt obligations rated in the
lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are
considered to have some speculative characteristics and are more sensitive to
economic change than higher rated securities.
See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
When-Issued Purchases and Forward Commitments. The Portfolios may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment," including "TBA" (to be announced) basis. These
transactions involve a commitment by the Portfolios to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), and permit the Portfolios to lock in a price
or yield on a security it owns or intends to purchase, regardless of future
changes in interest rates or market action. When-issued and forward commitment
transactions involve the risk, however, that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the securities delivery takes place.
When the Portfolios agree to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolios may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Portfolios' commitments. It may be expected that the market value of the
Portfolios' net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolios might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, the Portfolios expect that their forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of their total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolios
may realize a taxable capital gain or loss.
When a Portfolio engage in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolios do not earn interest
on the securities they have committed to purchase until they are paid for and
delivered on the settlement date.
Rights Offerings and Warrants to Purchase. The Portfolios may participate
in rights offerings and may purchase warrants, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Portfolios could lose
the purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' and warrants' expiration. Also, the
purchase of rights and/or warrants involves the risk that the effective price
paid for the right and/or warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Portfolio
will not invest more than 5% of its net assets, taken at market value, in
warrants, or more than 2% of its net assets, taken at market value, in warrants
not listed on the New York or American Stock Exchanges. Warrants acquired by the
Portfolios in units or attached to other securities are not subject to this
restriction.
Options and Futures Contracts. To the extent consistent with its investment
objective, the Portfolios may write (i.e. sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or
cross-hedging. For the payment of a premium, the purchaser of an option obtains
the right to buy (in the case of a call option) or to sell (in the case of a put
option) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular
securities, securities indices, or the yield differential between two
securities, or foreign currencies, and may or may not be listed on a securities
exchange and may or may not be issued by the Options Clearing Corporation. The
Portfolios will not purchase put and call options when the aggregate premiums on
outstanding options exceed 5% of its net assets at the time of purchase, and
will not write options on more than 25% of the value of its net assets (measured
at the time an option is written). Options trading is a highly specialized
activity
5
<PAGE>
that entails greater than ordinary investment risks. In addition, unlisted
options are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
To the extent consistent with its investment objective, a Portfolio may
also invest in futures contracts and options on futures contracts (interest rate
futures contracts or index futures contracts, as applicable) to commit funds
awaiting investment or maintain cash liquidity or for other hedging purposes.
These instruments are described in Appendix B to this Statement of Additional
Information. The value of the Portfolios' contracts may equal or exceed 100% of
its total assets, although a Portfolio will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of margin deposits
on its existing futures positions plus the amount of premiums paid for related
futures options entered into for other than bona fide hedging purposes is 5% or
less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make
delivery of securities, the cash value of a securities index or a stated
quantity of a foreign currency. A Portfolio may sell a futures contract in order
to offset an expected decrease in the value of its portfolio positions that
might otherwise result from a market decline or currency exchange fluctuation.
The Portfolios may do so either to hedge the value of their securities
portfolios as a whole, or to protect against declines occurring prior to sales
of securities in the value of the securities to be sold. In addition, the
Portfolios may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
The Portfolios may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Portfolio purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price during
the option period. When a Portfolio sells an option on a futures contract, it
becomes obligated to sell or buy a futures contract if the option is exercised.
In connection with the Portfolio's position in a futures contract or related
option, the Fund will create a segregated account of liquid assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options
are (a) the imperfect correlation between the change in market value of the
instruments held by the Portfolios and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in the performance of its
obligations.
The Fund intends to comply with the regulations of the Commodity Futures
Trading Commission exempting the Portfolios from registration as a "commodity
pool operator."
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in the underlying securities themselves. The Portfolios will write
call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the Portfolio maintains with
its custodian liquid assets equal to the contract value. A call option is also
covered if the Portfolio holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Portfolio in
liquid assets in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is recorded
as an asset of the Portfolio. When a Portfolio writes an option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Portfolio expires unexercised the Portfolio
realizes a loss equal to the premium paid. If the Portfolio enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by the Portfolio on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. If an option written by a Portfolio expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and
6
<PAGE>
the deferred credit related to such option will be eliminated. If an option
written by the Portfolio is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Portfolio will realize
a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
Securities Lending. The Portfolios may seek additional income by lending
securities on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. The Portfolios may not
make such loans in excess of 33 1/3% of the value of its total assets.
Securities loans involve risks of delay in receiving additional collateral or in
recovering the loaned securities, or possibly loss of rights in the collateral
if the borrower of the securities becomes insolvent.
The Portfolios would continue to accrue interest on loaned securities and
would also earn income on investment collateral for such loans. Any cash
collateral received by the Portfolios in connection with such loans may be
invested in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds.
Specifically, cash collateral may be invested in any of the following
instruments: (a) securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities and related
custodial receipts; (b) "first tier" quality commercial paper and other
obligations issued or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) in the highest rating category by at
least two NRSRO's, or one if only rated by one NRSRO; (c) U.S. dollar-
denominated obligations issued or supported by the credit of U.S. or foreign
banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks) (i.e. CD's, BA's and
time deposits); (d) repurchase agreements relating to the above instruments, as
well as corporate debt; and (e) unaffiliated money market funds. Any such
investments must be rated "first tier" and must have a maturity of 397 days or
less from the date of purchase.
Yields and Ratings. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"), Fitch
Investor Services, Inc. ("Fitch") and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. Subsequent to its purchase by the Portfolios, a rated security may cease
to be rated. The Portfolios' adviser or sub-adviser will consider such an event
in determining whether the Portfolios should continue to hold the security.
Investment Companies. In connection with the management of their daily cash
positions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share. The Portfolios may also invest in securities
issued by other investment companies with similar investment objectives. The
Portfolios may purchase shares of investment companies investing primarily in
foreign securities, including so-called "country funds." Country funds have
portfolios consisting exclusively of securities of issuers located in one
foreign country. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940 Act").
As a shareholder of another investment company, the Portfolios would bear, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory fees and other expenses the Portfolios bear directly in connection with
their own operations.
Each Portfolio currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (i) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (ii)
7
<PAGE>
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by a Portfolio or by the Fund as a whole.
Liquidity Management. As a temporary defensive measure if its sub-adviser
determines that market conditions warrant, the Portfolios may invest without
limitation in high quality money market instruments. The Portfolios may also
invest in high quality money market instruments pending investment or to meet
anticipated redemption requests. High quality money market instruments include
U.S. government obligations, U.S. government agency obligations, dollar
denominated obligations of foreign issuers, bank obligations, including U.S.
subsidiaries and branches of foreign banks, corporate obligations, commercial
paper, repurchase agreements and obligations of supranational organizations.
Generally, such obligations will mature within one year from the date of
settlement, but may mature within two years from the date of settlement.
Illiquid Securities. The Portfolios will not invest more than 15% of the
value of their net assets in securities that are illiquid. Repurchase agreements
and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to these limits. The
Portfolios may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the adviser or
sub-adviser that an adequate trading market exists for the securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Portfolios during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
Portfolio Turnover Rates. A Portfolio's annual portfolio turnover rate will
not be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular year.
High portfolio turnover rates (i.e., 100% or more) will generally result in
higher transaction costs to the Portfolios and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.
ADDITIONAL INVESTMENT LIMITATIONS
The Portfolios are subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Portfolio's outstanding shares (as defined below under "Miscellaneous").
Each Portfolio may not:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
2. Borrow money or issue senior securities, except that the Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of
one-third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with the Portfolio's investment practices are not deemed
to be pledged for purposes of this limitation.
3. Purchase or sell real estate, except that the Portfolio may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
4. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
8
<PAGE>
5. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts.
7. Purchase securities of companies for the purpose of exercising control.
8. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to the Portfolio's transactions in futures contracts and related options
or the Portfolio's sale of securities short against the box, and (b) the
Portfolio may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
10. Make loans, except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
11. Purchase or sell commodities except that the Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities, may engage in currency
transactions and may enter into futures contracts and related options.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Board of Trustees. The trustees and executive officers of the Fund, and their
business addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Retired; Executive Vice President and Chief Financial
698 Strafford Circle Officer from August 1997 - April 1999, Bell Atlantic
Strafford, PA 19087 Global Wireless (global wireless communications);
Age: 56 Executive Vice President, Chief Financial Officer and
Director from February 1995 - August 1997, Vice President
and Chief Financial Officer from January 1991 - February 1995,
Bell Atlantic Corporation (a diversified telecommunications
company); Director, American Water Works, Inc. (water utility)
since May 1990; Director, Triumph Group, Inc. (aviation
manufacturing, repair and maintenance services) since
May 1999; Director, Midwest Independent Transmission
Operator, Inc. (electrical transmission operator) since
December 1998; Trustee, The Carl E. & Emily I. Weller
Foundation since October 1991.
Raymond J. Clark* Trustee, President Treasurer of Princeton University since 1987; Trustee, The
Office of the Treasurer and Treasurer Compass Capital Group of Funds from 1987 to 1996;
</TABLE>
- ---------------------------------------
* This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
9
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Princeton University Trustee, Chemical Bank, New Jersey Advisory Board from
3 New South Building 1994 until 1995; Trustee, American Red Cross
P.O. Box 35 - Mercer County Chapter since 1995; Trustee,
Princeton, NJ 08540 Medical Center of Princeton; and Trustee,
Age: 64 United Way-Greater Mercer County from 1996-1997.
Robert M. Hernandez Trustee Director since 1991, Vice Chairman and Chief Financial
USX Corporation Officer since 1994, Executive Vice President -Accounting
600 Grant Street and Finance and Chief Financial Officer from 1991 to 1994,
6105 USX Tower USX Corporation (a diversified company principally engaged
Pittsburgh, PA 15219 in energy and steel businesses); Director and Chairman of
Age: 55 the Executive Committee, ACE Limited (insurance company);
Trustee, Allegheny University Hospitals, Allegheny General; and
Allegheny University Hospitals-West, Director, Marinette Marine
Corporation; Director, Transtar, Inc. (transportation
company) since 1996; and Director and Chairman of the Board, RTI
International Metals, Inc.
Anthony M. Santomero Vice Chairman of the Deputy Dean from 1990 to 1994, Richard K. Mellon Professor
The Wharton School Board of Finance since April 1984, Director, Wharton Financial
University of Pennsylvania Institutions Center since July 1995, and Dean's Advisory
Room 2344 Council Member since July 1984, The Wharton School,
Steinberg Hall-Dietrich Hall University of Pennsylvania; Member of Financial Economists
Philadelphia, Roundtable since January 1997; Co-editor,
PA 19104-6367 Brookings-Wharton Papers on Financial Services since
Age: 53 January 1997; Associate Editor, Journal of Banking and
Finance since June 1978; Associate Editor, Journal
of Economics and Business since October 1979; Associate Editor,
Journal of Money, Credit and Banking since January 1980; Editorial
Advisory Board, Open Economics Review since November 1990;
Director, The Zweig Fund and The Zweig Total Return Fund.
David R. Wilmerding, Jr. Chairman of the Board Chairman, Gee, Wilmerding & Associates, Inc. (investment
One Aldwyn Center advisers) since February 1989; Director, Beaver Management
Villanova, PA 19085 Corporation (land management corporation); Managing
Age: 64 General Partner, Chestnut Street Exchange Fund; Director,
Independence Square Income Securities, Inc.; Director, The
Mutual Fire, Marine and Inland Insurance Company;
Director, U.S. Retirement Communities, Inc.; Director,
Trustee or Managing General Partner of a number of
investment companies advised by BIMC and its affiliates.
Karen H. Sabath Assistant Secretary Managing Director, BlackRock Advisors, Inc. since February
BlackRock Advisors, Inc. 1998; President, Compass Capital Group, Inc. from 1995 to
345 Park Avenue March 1998; Managing Director of BlackRock Financial
New York, NY 10154 Management, Inc. since 1993; prior to 1993, Vice President
Age: 34 of BlackRock Financial Management, Inc.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Ellen L. Corson Assistant Treasurer Vice President and Director of Mutual Fund Accounting and
PFPC Inc. Administration, PFPC Inc. since November 1997; Assistant
103 Bellevue Parkway Vice President, PFPC Inc. from March 1997 to November
Wilmington, DE 19809 1997; Senior Accounting Officer, PFPC Inc. from March 1993
Age: 35 to March 1997.
Brian P. Kindelan Secretary Vice President and Senior Counsel, BlackRock Financial
BlackRock Financial Management, Inc. Management, Inc. since April 1998; Senior Counsel, PNC
1600 Market Street Bank Corp. from May 1995 to April 1998; Associate,
28th Fl. Stradley, Ronon, Stevens & Young, LLP from March 1990 to
Philadelphia, PA 19103 May 1995.
Age: 40
</TABLE>
The Fund pays trustees who are not affiliated with BlackRock Advisors, Inc.
("BlackRock") or BlackRock Distributors, Inc. ("BDI" or the "Distributor")
$20,000 annually ($30,000 annually in the event that the assets of the Fund
exceed $40 billion) and $350 per portfolio for each full in-person meeting of
the Board that they attend. The Fund pays the Chairman and Vice Chairman of the
Board an additional $10,000 and $5,000 per year, respectively, for their service
in such capacities. Trustees who are not affiliated with BlackRock or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. The term of office of each
trustee will automatically terminate when such trustee reaches 72 years of age.
No officer, director or employee of BlackRock, BlackRock Institutional
Management Corporation ("BIMC"), BlackRock Financial Management, Inc. ("BFM"),
BlackRock International, Ltd. ("BIL"), PFPC Inc. ("PFPC") (with BlackRock, the
"Administrators"), BDI, or PNC Bank, National Association ("PNC Bank") currently
receives any compensation from the Fund. As of the date of this Statement of
Additional Information, the trustees and officers of the Fund, as a group, owned
less than 1% of the outstanding shares of each class of each Portfolio.
The table below sets forth the compensation actually received from the Fund
and the Fund Complex of which the Fund is a part by the trustees for the fiscal
year ended September 30, 1999:
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated from Registrant and
Compensation as Part of Fund Annual Benefits Fund Complex1
Name of Person, Position from Registrant Expenses upon Retirement Paid to Trustees
------------------------ --------------- ---------------- --------------- -------------------
<S> <C> <C> <C> <C>
Anthony M. Santomero, Vice $77,850 N/A N/A (3)2 $84,850
Chairman of the Board
David R. Wilmerding, Jr., $82,850 N/A N/A (3)2 $98,850
Chairman of the Board
William O. Albertini, Trustee $72,850 N/A N/A (1)2 $72,850
Raymond J. Clark, Trustee $72,850 N/A N/A (1)2 $72,850
Robert M. Hernandez, Trustee $72,850 N/A N/A (1)2 $72,850
</TABLE>
- --------------------
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of investment company boards trustees served on within the
Fund Complex.
11
<PAGE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory and Sub-Advisory Agreements. The advisory and sub-advisory
services provided by BlackRock and BIL, and the fees received for such services,
are described in the Prospectuses.
For their advisory and subadvisory services, BlackRock and BIL are entitled
to fees, computed daily on the Portfolio-by-Portfolio basis and payable monthly,
at the maximum annual rates set forth below.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE
(BEFORE WAIVERS)
Average Daily Net Assets Investment Sub-Advisory
Advisory Fee Fee to BIL
first $1 billion
$1 billion -- $2 billion
$2 billion -- $3 billion
greater than $3 billion
Under the Advisory Contracts, BlackRock and BIL are not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund or the
Portfolios in connection with the performance of the Advisory Contracts. Under
the Advisory Contracts, BlackRock and BIL are liable for a loss resulting from
willful misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations thereunder. Each of the Advisory Contracts is terminable as to the
Portfolios by vote of the Fund's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the relevant Portfolio, at any
time without penalty, on 60 days' written notice to BlackRock and BIL as the
case may be. BlackRock and BIL may also terminate their advisory relationship
with respect to a Portfolio on 60 days' written notice to the Fund.
Administration Agreement. BlackRock and PFPC serve as the Fund's
co-administrators pursuant to an administration agreement (the "Administration
Agreement"). PFPC has agreed to maintain office facilities for the Fund; furnish
the Fund with statistical and research data, clerical, accounting, and
bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; prepare and file
certain reports required by regulatory authorities; prepare and file federal and
state tax returns; prepare and file material requested by state securities
regulators;
12
<PAGE>
calculate various contractual expenses; compute the Portfolios' net asset value,
net income and net capital gain or loss; and serve as a liaison with the Fund's
independent public accountants. The Administrators may from time to time
voluntarily waive administration fees with respect to the Portfolios and may
voluntarily reimburse the Portfolios for expenses.
Under the Administration Agreement, the Fund pays to BAI and PFPC on behalf
of the Portfolios a fee, computed daily and payable monthly, at an aggregate
annual rate of (i) .085% of the first $500 million of each Portfolio's average
daily net assets, .075% of the next $500 million of a Portfolio's average daily
net assets and .065% of the average daily net assets of the Portfolio in excess
of $1 billion and (ii) .145% of the first $500 million of average daily net
assets allocated to each class of shares of the Portfolio, .135% of the next
$500 million of such average daily net assets and .125% of the average daily net
assets allocated to each class of shares of the Portfolio in excess of $1
billion.
Under the Administration Agreement, BlackRock is responsible for: (i) the
supervision and coordination of the performance of the Fund's service providers;
(ii) the negotiation of service contracts and arrangements between the Fund and
its service providers; (iii) acting as liaison between the trustees of the Fund
and the Fund's service providers; and (iv) providing ongoing business management
and support services in connection with the Fund's operations. Pursuant to the
terms of the Administration Agreement, BlackRock has delegated certain of its
duties thereunder to BDI.
The Administration Agreement provides that BlackRock and PFPC will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Portfolios in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder. In
addition, the Fund will indemnify each of BAI and PFPC and their affiliates
against any loss arising in connection with their provision of services under
the Administration Agreement, except that neither BAI nor PFPC nor their
affiliates shall be indemnified against any loss arising out of willful
misfeasance, bad faith, gross negligence or reckless disregard of their
respective duties under the Administration Agreement.
The Fund and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services
for certain employee benefit, profit-sharing and retirement plans as agent for
the Fund with respect to such plans, for the purpose of accepting orders for the
purchase and redemption of shares of the Fund.
Custodian and Transfer Agency Agreements. Pursuant to the terms of a
custodian agreement (the "Custodian Agreement") between the Fund and PNC Bank,
as of January 1, 1999 PNC Bank has assigned its rights and delegated its duties
as the Fund's custodian to its affiliate, PFPC Trust Company ("PTC"). Under the
Custodian Agreement, PTC or a sub-custodian (i) maintains a separate account or
accounts in the name of the Portfolios, (ii) holds and transfers portfolio
securities on account of the Portfolios, (iii) accepts receipts and makes
disbursements of money on behalf of the Portfolios, (iv) collects and receives
all income and other payments and distributions on account of the Portfolios'
securities and (v) makes periodic reports to the Board of Trustees concerning
the Portfolios' operations. PTC is authorized to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Fund, provided that,
with respect to sub-custodians other than sub-custodians for foreign securities,
PTC remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Fund harmless from the acts and omissions of
any sub-custodian. Citibank, N.A. serves as the international sub-custodian for
various Portfolios of the Fund.
For its services to the Fund under the Custodian Agreement, PTC receives a
fee which is calculated based upon each investment portfolios' average gross
assets. PTC is also entitled to out-of-pocket expenses and certain transaction
charges.
PFPC, which has its principal offices at 400 Bellevue Parkway, Wilmington,
DE 19809 and is an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in the Portfolios, (ii) addresses
and mails all communications by the Portfolios to record owners of their shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder accounts
and, if requested, sub-accounts and (iv) makes periodic reports to the Board of
Trustees concerning the operations of the Portfolios. PFPC may, on 30 days'
notice to the Fund, assign its duties as transfer and dividend disbursing agent
to any other affiliate of PNC Bank Corp. For its services with respect to the
Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in the Portfolios, plus per account
fees and disbursements. For its services under the Transfer Agency Agreement
with respect to Investor Shares, PFPC receives per account fees. Until further
notice, the transfer agency fees for each series of Investor Shares in the
Portfolios will not exceed the annual rate of .10% of the series' average daily
net assets.
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Distributor and Distribution and Service Plan. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of the Portfolios on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares. The Distributor's
principal business address is Four Falls Corporate Center, 6th Floor, West
Conshohocken, PA 19428-2961.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or BlackRock or any other
affiliate of PNC Bank fees for distribution and sales support services.
Currently, as described further below, only Investor A Shares, Investor B Shares
and Investor C Shares bear the expense of distribution fees under the Plan. In
addition, the Fund may pay BlackRock fees for the provision of personal services
to shareholders and the processing and administration of shareholder accounts.
BlackRock, in turn, determines the amount of the service fee and shareholder
processing fee to be paid to brokers, dealers, financial institutions and
industry professionals (collectively, "Service Organizations"). The Plan
provides, among other things, that: (i) the Board of Trustees shall receive
quarterly reports regarding the amounts expended under the Plan and the purposes
for which such expenditures were made; (ii) the Plan will continue in effect for
so long as its continuance is approved at least annually by the Board of
Trustees in accordance with Rule 12b-1 under the 1940 Act; (iii) any material
amendment thereto must be approved by the Board of Trustees, including the
trustees who are not "interested persons" of the Fund (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
the Plan or any agreement entered into in connection with the Plan (the "12b-1
Trustees"), acting in person at a meeting called for said purpose; (iv) any
amendment to increase materially the costs which any class of shares may bear
for distribution services pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding shares of such class and by
a majority of the 12b-1 Trustees; and (v) while the Plan remains in effect, the
selection and nomination of the Fund's trustees who are not "interested persons"
of the Fund shall be committed to the discretion of the Fund's non-interested
trustees.
The Plan is terminable as to any class of shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of a Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of a Portfolio's outstanding Investor B Shares) are intended to cover the
expense to the Distributor of paying such up-front commissions, as well as to
cover ongoing commission payments to broker/dealers. The contingent deferred
sales charge is calculated to charge the investor with any shortfall that would
occur if Investor B Shares are redeemed prior to the expiration of the
conversion period, after which Investor B Shares automatically convert to
Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of a Portfolio's outstanding Investor C Shares) are intended to cover the
expense to the Distributor of paying such up-front commissions, as well as to
cover ongoing commission payments to the broker/dealers. The contingent deferred
sales charge is calculated to charge the investor with any shortfall that would
occur if Investor C Shares are redeemed within 12 months of purchase.
The Fund is not required or permitted under the Plan to make distribution
payments with respect to Service or Institutional Shares. However, the Plan
permits BDI, BlackRock, PFPC and other companies that receive fees from the Fund
to make payments relating to distribution and sales support activities out of
their past profits or other sources available to them. The Distributor,
BlackRock and their affiliates may pay affiliated and unaffiliated financial
institutions, broker/dealers and/or their salespersons certain compensation for
the sale and distribution of shares of the Fund or for services to the Fund.
These payments ("Additional Payments") would be in addition to the payments by
the Fund described in this Statement of Additional Information for distribution
and shareholder servicing and processing. These Additional Payments may take the
form of "due diligence" payments for a dealer's examination of the Portfolios
and payments for providing extra employee training and information relating to
Portfolios; "listing" fees for the placement of the Portfolios on a dealer's
list of mutual funds available for purchase by its customers; "finders" or
"referral" fees for directing investors to the Fund; "marketing support" fees
for providing assistance in promoting the sale of the Funds' shares; and
payments for the sale of shares and/or the maintenance of share balances. In
addition, the Distributor, BlackRock and their affiliates may make Additional
Payments to affiliated and unaffiliated entities for
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subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Fund. The
Additional Payments made by the Distributor, BlackRock and their affiliates may
be a fixed dollar amount, may be based on the number of customer accounts
maintained by a financial institution or broker/dealer, or may be based on a
percentage of the value of shares sold to, or held by, customers of the
affiliated and unaffiliated financial institutions or dealers involved, and may
be different for different institutions and dealers. Furthermore, the
Distributor, BlackRock and their affiliates may contribute to various non-cash
and cash incentive arrangements to promote the sale of shares, and may sponsor
various contests and promotions subject to applicable NASD regulations in which
participants may receive prizes such as travel awards, merchandise and cash. The
Distributor, BlackRock and their affiliates may also pay for the travel
expenses, meals, lodging and entertainment of broker/dealers, financial
institutions and their salespersons in connection with educational and sales
promotional programs subject to applicable NASD regulations.
Service Organizations may charge their clients additional fees for
account-related services.
The Fund intends to enter into service arrangements with Service
Organizations pursuant to which Service Organizations will render certain
support services to their customers ("Customers") who are the beneficial owners
of Service, Investor A, Investor B and Investor C Shares. Such services will be
provided to Customers who are the beneficial owners of Shares of such classes
and are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of a service fee of up to .25% (on an annualized
basis) of the average daily net asset value of the Investor A, Investor B and
Investor C Shares owned beneficially by their Customers and .15% (on an
annualized basis) of the average daily net asset value of the Service Shares
beneficially owned by their Customers, Service Organizations may provide general
shareholder liaison services, including, but not limited to (i) answering
customer inquiries regarding account status and history, the manner in which
purchases, exchanges and redemptions of shares may be effected and certain other
matters pertaining to the Customers' investments; and (ii) assisting Customers
in designating and changing dividend options, account designations and
addresses. In consideration for payment of a shareholder processing fee of up to
a separate .15% (on an annualized basis) of the average daily net asset value of
Service, Investor A, Investor B and Investor C Shares owned beneficially by
their Customers, Service Organizations may provide one or more of these
additional services to such Customers: (i) providing necessary personnel and
facilities to establish and maintain Customer accounts and records; (ii)
assistance in aggregating and processing purchase, exchange and redemption
transactions; (iii) placement of net purchase and redemption orders with the
Distributor; (iv) arranging for wiring of funds; (v) transmitting and receiving
funds in connection with Customer orders to purchase or redeem shares; (vi)
processing dividend payments; (vii) verifying and guaranteeing Customer
signatures in connection with redemption orders and transfers and changes in
Customer-designated accounts, as necessary; (viii) providing periodic statements
showing Customers' account balances and, to the extent practicable, integrating
such information with other Customer transactions otherwise effected through or
with a Service Organization; (ix) furnishing (either separately or on an
integrated basis with other reports sent to a shareholder by a Service
Organization) monthly and year-end statements and confirmations of purchases,
exchanges and redemptions; (x) transmitting on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other communications from
the Fund to Customers; (xi) receiving, tabulating and transmitting to the Fund
proxies executed by Customers with respect to shareholder meetings; (xii)
providing subaccounting with respect to shares beneficially owned by Customers
or the information to the Fund necessary for subaccounting; (xiii) providing
sub-transfer agency services; and (xiv) providing such other similar services as
the Fund or a Customer may request.
Code of Ethics. The Fund, BlackRock and the sub-advisers, and the Distributor
have adopted codes of ethics under Rule 17j-1 of the 1940 Act. These codes of
ethics permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
EXPENSES
Expenses are deducted from the total income of the Portfolios before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock, PFPC, transfer agency fees, fees and
expenses of officers and trustees who are not affiliated with BlackRock, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by BlackRock or the
Fund's service providers under their agreements with the Fund. Any general
expenses
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of the Fund that do not belong to a particular investment portfolios will be
allocated among all investment portfolios by or under the direction of the Board
of Trustees in a manner the Board determines to be fair and equitable.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers seek to
obtain the best price and most favorable execution for the Portfolios, taking
into account such factors as the price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. While the adviser and sub-advisers
generally seek reasonably competitive commission rates, payment of the lowest
commission or spread is not necessarily consistent with obtaining the best price
and execution in particular transactions. Payments of commissions to brokers who
are affiliated persons of the Fund (or affiliated persons of such persons) will
be made in accordance with Rule 17e-1 under the 1940 Act.
No Portfolio has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The adviser and sub-advisers may,
consistent with the interests of the Portfolios, select brokers on the basis of
the research, statistical and pricing services they provide to the Portfolios
and the adviser's or sub-adviser's other clients. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by the adviser and sub-advisers under their
respective contracts. A commission paid to such brokers may be higher than that
which another qualified broker would have charged for effecting the same
transaction, provided that the adviser or sub-adviser determines in good faith
that such commission is reasonable in terms either of the transaction or the
overall responsibility of the adviser or sub-adviser to the Portfolios and its
other clients and that the total commissions paid by the Portfolios will be
reasonable in relation to the benefits to the Portfolios over the long-term. The
advisory fees that the Portfolios pay to the adviser will not be reduced as a
consequence of the adviser's or sub-advisers' receipt of brokerage and research
services. To the extent the Portfolios' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolios will
exceed those that might otherwise be paid by an amount which cannot be presently
determined. Such services generally would be useful and of value to the adviser
or sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
generally would be useful to the adviser and sub-advisers in carrying out their
obligations to the Portfolios. While such services are not expected to reduce
the expenses of the adviser or sub-advisers, the advisers would, through use of
the services, avoid the additional expenses which would be incurred if they
should attempt to develop comparable information through their own staffs.
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by the Portfolios are made from
dealers, underwriters and issuers. The Portfolios do not currently expect to
incur any brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
The adviser or sub-adviser may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from the Portfolios prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that the Portfolios' anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that the Portfolios would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for the Portfolios and for other investment accounts
managed by the adviser or sub-adviser are made independently of each other in
light of differing conditions. However, the same investment decision may be made
for two or
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more such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the Portfolios are concerned, in other cases it could be beneficial to the
Portfolios. The Portfolios will not purchase securities during the existence of
any underwriting or selling group relating to such securities of which BlackRock
and BIL, PTC, the Administrators, the Distributor or any affiliated person (as
defined in the 1940 Act) thereof is a member except pursuant to procedures
adopted by the Board of Trustees in accordance with Rule 10f-3 under the 1940
Act. In no instance will portfolio securities be purchased from or sold to
BlackRock Advisors, Inc., BIL, PNC Bank, PTC, PFPC, the Distributor or any
affiliated person of the foregoing entities except as permitted by SEC exemptive
order or by applicable law.
The portfolio turnover rate of the Portfolios is calculated by dividing the
lesser of the Portfolios' annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolios during the year.
PURCHASE AND REDEMPTION INFORMATION
Investor Shares
Purchase of Shares. The minimum investment for the initial purchase of
shares is $500; there is a $50 minimum for subsequent investments. Purchases
through the Automatic Investment Plan are subject to a lower initial purchase
minimum. In addition, the minimum initial investment for employees of the Fund,
the Fund's investment adviser, sub-advisers, Distributor or transfer agent or
employees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.
Purchases Through Brokers. It is the responsibility of brokers to transmit
purchase orders and payment on a timely basis. Generally, if payment is not
received within the period described above, the order will be canceled, notice
thereof will be given, and the broker and its customers will be responsible for
any loss to the Fund or its shareholders. Orders of less than $500 may be mailed
by a broker to the transfer agent.
The Fund has authorized one or more brokers to receive on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on the Fund's behalf,
and the Fund will be deemed to have received a purchase or redemption order when
an authorized broker or, if applicable, a broker's authorized designee, receives
the order. Such customer orders will be priced at the Fund's net asset value
next computed after they are received by an authorized broker or the broker's
authorized designee.
Purchases Through the Transfer Agent. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial
purchase amount payable to BlackRock Funds. The Fund does not accept third party
checks for initial or subsequent investments. An Account Application Form may be
obtained by calling (800) 441-7762. The name of the Portfolio with respect to
which shares are purchased must also appear on the check or Federal Reserve
Draft. Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, specify
the class of Investor Shares and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions.
Other Purchase Information. Shares of the Portfolios of the Fund are sold
on a continuous basis by BDI as the Distributor. BDI maintains its principal
offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA
19428-2961. Purchases may be effected on weekdays on which the New York Stock
Exchange is open for business (a "Business Day"). Payment for orders which are
not received or accepted will be returned after prompt inquiry. The issuance of
shares is recorded on the books of the Fund. No certificates will be issued for
shares. Payments for shares of a Portfolio may, in the discretion of the Fund's
investment adviser, be made in the form of securities that are permissible
investments for that Portfolio. The Fund reserves the right to reject any
purchase order, to modify or waive the minimum initial or subsequent investment
requirement and to suspend and resume the sale of any share class of any
Portfolio at any time.
In the event that a shareholder acquiring Investor A Shares on or after May
1, 1998 at a future date meets the eligibility standards for purchasing
Institutional Shares (other than due to fluctuations in market value), then the
shareholder's Investor A Shares will, upon the direction of the Fund's
distributor, automatically be converted to Institutional Shares of the same
Portfolio having the same aggregate net asset value as the shares converted.
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Unless a sales charge waiver applies, Investor B shareholders pay a
contingent deferred sales charge if they redeem during the first six years after
purchase, and Investor C shareholders pay a contingent deferred sales charge if
they redeem during the first twelve months after purchase. Investors expecting
to redeem during these periods should consider the cost of the applicable
contingent deferred sales charge in addition to the aggregate annual Investor B
or Investor C distribution fees, as compared with the cost of the initial sales
charges applicable to the Investor A Shares.
Dealer Reallowances
The following are the front-end sales loads reallowed to dealers as a
percentage of the offering price of Investor A Shares.
Reallowance or
Amount of Transaction Placement Fees
at Offering Price to Dealers (as % of
Offering Price)*
Less than $50,000 4.50%
$50,000 but less than $100,000 4.25
$100,000 but less than $250,000 4.00
$250,000 but less than $500,000 3.00
$500,000 but less than $1,000,000 2.00
$1 million but less than $3 million 1.00
$3 million but less than $15 million 0.50
$15 million and above 0.25
* The Distributor may pay placement fees to dealers as shown on purchases of
Investor A Shares of $1,000,000 or more.
During special promotions, the entire sales charge may be reallowed to
dealers. Dealers who receive 90% or more of the sales charge may be deemed to be
"underwriters" under the 1933 Act. The amount of the sales charge not reallowed
to dealers may be paid to broker-dealer affiliates of PNC Bank Corp. who provide
sales support services. The Distributor, BlackRock, Inc. and/or their affiliates
may also pay additional compensation, out of their assets and not as an
additional charge to the Portfolios, to dealers in connection with the sale and
distribution of shares (such as additional payments based on new sales), and
may, subject to applicable NASD regulations, contribute to various non-cash and
cash incentive arrangements to promote the sale of shares, as well as sponsor
various educational programs, sales contests and promotions in which
participants may receive reimbursement of expenses, entertainment and prizes
such as travel awards, merchandise and cash.
The following special purchase plans result in the waiver or reduction of
sales charges for Investor A, B or C shares.
Sales Charge Waivers--Investor A Shares
Qualified Plans. In general, the sales charge (as a percentage of the
offering price) payable by qualified employee benefit plans ("Qualified Plans")
having at least 20 employees eligible to participate in purchases of Investor A
Shares of a Portfolio aggregating less than $500,000 will be 1.00%. No sales
charge will apply to purchases by such Qualified Plans of Investor A Shares
aggregating $500,000 and above. The sales charge payable by Qualified Plans
having less than 20 employees eligible to participate in purchases of Investor A
Shares of the Portfolio aggregating less than $500,000 will be 2.50%. The above
schedule will apply to purchases by such Qualified Plans of Investor A Shares
aggregating $500,000 and above.
The Fund has established different waiver arrangements with respect to the
sales charge on Investor A Shares of the Portfolios for purchases through
certain Qualified Plans participating in programs whose sponsors or
administrators have entered into arrangements with the Fund.
Investor A Shares of the Portfolios will be made available to plan
participants at net asset value with the waiver of the initial sales charge on
purchases through an eligible 401(k) plan participating in a Merrill Lynch
401(k) Program (an "ML 401(k) Plan") if:
(i) the ML 401(k) Plan is record kept on a daily valuation basis by
Merrill Lynch and, on the date the ML 401(k) Plan sponsor signs the Merrill
Lynch Recordkeeping Service Agreement, the ML 401(k) Plan has $3 million or
more in assets invested in broker/dealer funds not advised or managed by
Merrill Lynch Asset Management, L.P. ("MLAM") that
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are made available pursuant to a Services Agreement between Merrill Lynch
and the fund's principal underwriter or distributor and in funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by
an independent recordkeeper whose services are provided through a contract
or alliance arrangement with Merrill Lynch, and on the date the ML 401(k)
Plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the
ML 401(k) Plan has $3 million or more in assets, excluding money market
funds, invested in Applicable Investments; or
(iii) the ML 401(k) Plan has 500 or more eligible employees, as
determined by the Merrill Lynch plan conversion manager, on the date the ML
401(k) Plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.
Other. The following persons associated with the Fund, the Distributor, the
Fund's investment adviser, sub-advisers or transfer agent and their affiliates
may buy Investor A Shares of the Portfolios without paying a sales charge to the
extent permitted by these firms: (a) officers, directors and partners (and their
spouses and minor children); (b) employees and retirees (and their spouses and
minor children); (c) registered representatives of brokers who have entered into
selling agreements with the Distributor; (d) spouses or children of such
persons; and (e) any trust, pension, profit-sharing or other benefit plan for
any of the persons set forth in (a) through (c). The following persons may also
buy Investor A Shares without paying a sales charge: (a) persons investing
through an authorized payroll deduction plan; (b) persons investing through an
authorized investment plan for organizations which operate under Section
501(c)(3) of the Internal Revenue Code; (c) registered investment advisers,
trust companies and bank trust departments exercising discretionary investment
authority with respect to amounts to be invested in the Portfolios; (d) persons
participating in a "wrap account" or similar program under which they pay
advisory fees to a broker-dealer or other financial institution; and (e) persons
participating in an account or program under which they pay fees to a
broker-dealer or other financial institution for providing transaction
processing and other administrative services, but not investment advisory
services. Investors who qualify for any of these exemptions from the sales
charge must purchase Investor A Shares.
Reduced Sales Charges--Investor A Shares
Because of reductions in the front-end sales charge for purchases of
Investor A Shares aggregating $50,000 or more, it may be advantageous for
investors purchasing large quantities of Investor Shares to purchase Investor A
Shares. In any event, the Fund will not accept any purchase order for $1,000,000
or more of Investor B Shares or Investor C Shares.
Quantity Discounts. Larger purchases may reduce the sales charge price.
Upon notice to the investor's broker or the transfer agent, purchases of
Investor A Shares made at any one time by the following persons may be
considered when calculating the sales charge: (a) an individual, his or her
spouse and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized for
the purpose of buying redeemable securities of a registered investment company,
and if the purchase is made through a central administrator, or through a single
dealer, or by other means which result in economy of sales effort or expense. An
organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker/dealer or clients of an investment adviser. Purchases made by an
organized group may include, for example, a trustee or other fiduciary
purchasing for a single fiduciary account or other employee benefit plan
purchases made through a payroll deduction plan.
Right of Accumulation. Under the Right of Accumulation, the current value
of an investor's existing Investor A Shares that are subject to a front-end
sales charge or the total amount of an investor's initial investment in such
shares, less redemptions (whichever is greater) may be combined with the amount
of the investor's current purchase in determining the applicable sales charge.
In order to receive the cumulative quantity reduction, previous purchases of
Investor A Shares must be called to the attention of PFPC by the investor at the
time of the current purchase.
Reinvestment Privilege. Upon redemption of Investor A Shares (or Investor A
Shares of another Non-Money Market Portfolio of the Fund), a shareholder has a
one-time right, to be exercised within 60 days, to reinvest the redemption
proceeds without any sales charges. PFPC must be notified of the reinvestment in
writing by the purchaser, or by his or her broker, at the time purchase is made
in order to eliminate a sales charge. An investor should consult a tax adviser
concerning the tax consequences of use of the reinvestment privilege.
Letter of Intent. An investor may qualify for a reduced sales charge
immediately by signing a Letter of Intent stating the investor's intention to
invest during the next 13 months a specified amount in Investor A Shares which,
if made at one time, would qualify for a reduced sales charge. The Letter of
Intent may be signed at any time within 90 days after the first investment to be
included in the Letter of Intent. The initial investment must meet the minimum
initial investment requirement and represent
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at least 5% of the total intended investment. The investor must instruct PFPC
upon making subsequent purchases that such purchases are subject to a Letter of
Intent. All dividends and capital gains of a Portfolio that are invested in
additional Investor A Shares of the same Portfolio are applied to the Letter of
Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold
Investor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will be released when the full
amount indicated has been purchased. Any redemptions made during the 13-month
period will be subtracted from the amount of purchases in determining whether
the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period,
the investor will be required to pay an amount equal to the difference between
the sales charge actually paid and the sales charge the investor would have had
to pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the
expiration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
Investor B Shares
Investor B Shares are subject to a deferred sales charge if they are
redeemed within six years of purchase. Dealers will generally receive
commissions equal to 4.00% of Investor B Shares sold by them plus ongoing fees
under the Fund's Amended and Restated Distribution and Service Plan. Dealers may
not receive a commission in connection with sales of Investor B Shares to
certain retirement plans sponsored by the Fund, BlackRock or its affiliates, but
may receive fees under the Amended and Restated Distribution and Service Plan.
These commissions and payments may be different than the reallowances, placement
fees and commissions paid to dealers in connection with sales of Investor A
Shares and Investor C Shares.
Investor C Shares
Investor C Shares are subject to a deferred sales charge of 1.00% based on
the lesser of the offering price or the net asset value of the Investor C Shares
on the redemption date if redeemed within twelve months after purchase. Dealers
will generally receive commissions equal to 1.00% of the Investor C Shares sold
by them plus ongoing fees under the Fund's Amended and Restated Distribution and
Service Plan. Dealers may not receive a commission in connection with sales of
Investor C Shares to certain retirement plans sponsored by the Fund, BlackRock
or its affiliates, but may receive fees under the Amended and Restated
Distribution and Service Plan. These commissions and payments may be different
than the reallowances, placement fees and commissions paid to dealers in
connection with sales of Investor A Shares and Investor B Shares.
Exemptions from and Reductions of the Contingent Deferred Sales Charge-
Investor B and Investor C Shares. The contingent deferred sales charge on
Investor B Shares and Investor C Shares is not charged in connection with: (1)
exchanges described in "Exchange Privilege" below; (2) redemptions made in
connection with minimum required distributions from IRA, 403(b)(7) and Qualified
Plan accounts due to the shareholder reaching age 70 1/2; (3) redemptions made
with respect to certain retirement plans sponsored by the Fund, BlackRock or its
affiliates; (4) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code) subsequent to the purchase
of Investor B Shares or Investor C Shares; (5) involuntary redemptions of
Investor B Shares or Investor C Shares in accounts with low balances as
described in "Redemption of Shares" below; and (6) redemptions made pursuant to
the Systematic Withdrawal Plan, subject to the limitations set forth under
"Systematic Withdrawal Plan" below. In addition, no contingent deferred sales
charge is charged on Investor B Shares or Investor C Shares acquired through the
reinvestment of dividends or distributions. The Fund also waives the contingent
deferred sales charge on redemptions of Investor B Shares of a Portfolio
purchased through certain Qualified Plans participating in programs whose
sponsors or administrators have entered into arrangements with the Fund.
Investor B Shares of the Non-Money Market Portfolios will be made available
to plan participants at net asset value with the waiver of the contingent
deferred sales charge if the shares were purchased through an ML 401(k) Plan if:
(i) the ML 401(k) Plan is recordkept on a daily valuation basis by
Merrill Lynch and, on the date the ML 401(k) Plan sponsor signs the Merrill
Lynch Recordkeeping Service Agreement, the ML 401(k) Plan has less than $3
million in assets invested in Applicable Investments; or
(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the ML 401(k) Plan
sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the ML
401(k) Plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or
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(iii) the ML 401(k) Plan has less than 500 eligible employees, as
determined by the Merrill Lynch plan conversion manager, on the date the ML
401(k) Plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.
ML 401(k) Plans recordkept on a daily basis by Merrill Lynch or an
independent recordkeeper under a contract with Merrill Lynch that are currently
investing in Investor B shares of Non-Money Market Portfolios of the Fund
convert to Investor A shares once the ML 401(k) Plan has reached $5 million
invested in Applicable Investments. The ML 401(k) Plan will receive a plan-level
share conversion.
When an investor redeems Investor B Shares or Investor C Shares, the
redemption order is processed to minimize the amount of the contingent deferred
sales charge that will be charged. Investor B Shares and Investor C Shares are
redeemed first from those shares that are not subject to the deferred sales load
(i.e., shares that were acquired through reinvestment of dividends or
distributions) and after that from the shares that have been held the longest.
Shareholder Features
Exchange Privilege. Exchanges of Investor A Shares may be subject to the
difference between the sales charge previously paid on the exchanged shares and
the higher sales charge (if any) payable with respect to the shares acquired in
the exchange. Unless an exemption applies, a front-end sales charge will be
charged in connection with exchanges of Investor A Shares of the Money Market
Portfolios for Investor A Shares of the Fund's Non-Money Market Portfolios.
Similarly, exchanges of Investor B or Investor C Shares of a Money Market
Portfolio for Investor B or Investor C Shares of a Non-Money Market Portfolio of
the Fund will also be subject to a CDSC, unless an exemption applies. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemption of Investor B and Investor C Shares, the holding
period of the Investor B or Investor C Shares originally held will be added to
the holding period of the Investor B or Investor C Shares acquired through
exchange. No exchange fee is imposed by the Fund.
Investor A Shares of Money Market Portfolios of the Fund that were (1)
acquired through the use of the exchange privilege and (2) can be traced back to
a purchase of shares in one or more investment Portfolios of the Fund for which
a sales charge was paid, can be exchanged for Investor A Shares of the Portfolio
subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject to a
CDSC, which will continue to be measured from the date of the original purchase
and will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written
request to PFPC at the address given above. Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege.
Shareholders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange requests.
To add this feature to an existing account that previously did not provide this
option, a Telephone Exchange Authorization Form must be filed with PFPC. This
form is available from PFPC. Once this election has been made, the shareholder
may simply contact PFPC by telephone at (800) 441-7762 to request the exchange.
During periods of substantial economic or market change, telephone exchanges may
be difficult to complete and shareholders may have to submit exchange requests
to PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
broker of record as the account from which shares are exchanged, unless
otherwise specified in writing by the shareholder with all signatures guaranteed
by an eligible guarantor institution as defined below. In order to participate
in the Automatic Investment Program or establish a Systematic Withdrawal Plan
for the new account, however, an exchanging shareholder must file a specific
written request.
Any share exchange must satisfy the requirements relating to the minimum
initial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share
exchange is a taxable event and, accordingly, a capital gain or loss may be
realized. Before making an exchange request, shareholders should consult a tax
or other financial adviser and should consider the investment objective,
policies and restrictions of the investment portfolio into which the shareholder
is making an exchange. Brokers may charge a fee for handling exchanges.
The Fund reserves the right to suspend, modify or terminate the exchange
privilege at any time. Notice will be given to shareholders of any material
modification or termination except where notice is not required. The Fund
generally will suspend or terminate the exchange privilege of a shareholder who
makes more than five exchanges out of any Portfolio in any twelve-month period
or when the proposed exchange would make it difficult for the Portfolio's
sub-adviser to invest effectively in accordance with that Portfolio's investment
objective.
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The Fund reserves the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency, and
to other restrictions that may be established from time to time to ensure that
exchanges do not operate to the disadvantage of any Portfolio or its
shareholders. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. The Fund, the Administrators and the Distributor will not be liable for
any loss, liability, cost or expense for acting upon telephone instructions
reasonably believed to be genuine in accordance with such procedures. Exchange
orders may also be sent by mail to the shareholder's broker or to PFPC at P.O.
Box 8907, Wilmington, Delaware 19899-8907.
By use of the exchange privilege, the investor authorizes the Fund's
transfer agent to act on telephonic or written exchange instructions from any
person representing himself to be the investor and believed by the Fund's
transfer agent to be genuine. The records of the Fund's transfer agent
pertaining to such instructions are binding. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to affected
shareholders. The exchange privilege is only available in states where the
exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Investor A Shares, Investor B Shares or Investor C Shares of a
Non-Money Market Portfolio.
Automatic Investment Plan ("AIP"). Investor Share shareholders and certain
Service Share shareholders who were shareholders or the Compass Capital Group of
Funds at the time of its combination with The PNC(R) Fund in 1996 may arrange
for periodic investments in that Portfolio through automatic deductions from a
checking or savings account by completing the AIP Application Form which may be
obtained from PFPC. The minimum pre-authorized investment amount is $50.
Systematic Withdrawal Plan ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by Investor Share shareholders and certain Service Share
shareholders who were shareholders at the Compass Capital Group of Funds at the
time of its combination with The PNC(R) Fund in 1996 who wish to receive regular
distributions from their accounts. Upon commencement of the SWP, the account
must have a current value of $10,000 or more in a Portfolio. Shareholders may
elect to receive automatic cash payments of $50 or more either monthly, every
other month, quarterly, semi-annually, or annually. Automatic withdrawals are
normally processed on the 25th day of the application month or, if such day is
not a Business Day, on the next Business Day and are paid promptly thereafter.
An investor may utilize the SWP by completing the SWP Application Form which may
be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends
their invested principal in the account will be depleted. To participate in the
SWP, shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any time,
upon written notice to PFPC. Purchases of additional Investor A Shares of the
Fund concurrently with withdrawals may be disadvantageous to investors because
of the sales charges involved and, therefore, are discouraged. No contingent
deferred sales charge will be assessed on redemptions of Investor B or Investor
C Shares made through the SWP that do not exceed 12% of an account's net asset
value on an annualized basis. For example, monthly, quarterly and semi-annual
SWP redemptions of Investor B or Investor C Shares will not be subject to the
CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account's net
asset value on the redemption date. SWP redemptions of Investor B or Investor C
Shares in excess of this limit are still subject to the applicable CDSC.
Redemption of Shares. Except as noted below, a request for redemption must
be signed by all persons in whose names the shares are registered. Signatures
must conform exactly to the account registration. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible
guarantor institution.
A signature guarantee is designed to protect the shareholders and the
Portfolios against fraudulent transactions by unauthorized persons. A signature
guarantee may be obtained from a domestic bank or trust company, recognized
broker, dealer, clearing agency, savings association who are participants in a
medallion program by the Securities Transfer Association, credit unions,
national securities exchanges and registered securities associations. The three
recognized medallion programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a
part of these programs will not be accepted. Please note that a notary public
stamp or seal is not acceptable.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. Shareholders holding Investor A Share
certificates must send their
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certificates with the redemption request. Additional documentary evidence of
authority is required by PFPC in the event redemption is requested by a
corporation, partnership, trust, fiduciary, executor or administrator.
Payment of Redemption Proceeds. The Fund may suspend the right of
redemption or postpone the date of payment upon redemption for such periods as
are permitted under the 1940 Act, and may redeem shares involuntarily or make
payment for redemption in securities or other property when determined
appropriate in light of the Fund's responsibilities under the 1940 Act.
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase of the
Portfolios' shares by making payment in whole or in part in securities chosen by
the Fund and valued in the same way as they would be valued for purposes of
computing the Portfolios' net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the 1940
Act so that the Portfolios are obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of a Portfolio.
Under the 1940 Act, the Portfolios may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Portfolios
may also suspend or postpone the recordation of the transfer of shares upon the
occurrence of any of the foregoing conditions.)
The Fund may redeem shares involuntarily to reimburse the Portfolios for
any loss sustained by reason of the failure of a shareholder to make
full-payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder. The Fund
reserves the express right to redeem shares of the Portfolios involuntarily at
any time if the Fund's Board of Trustees determines, in its sole discretion,
that failure to do so may have adverse consequences to the holders of shares in
the Portfolios. Upon such redemption the holders of shares so redeemed shall
have no further right with respect thereto other than to receive payment of the
redemption price.
Institutional Shares
Purchase of Shares. Institutional Shares are offered to institutional
investors, including (a) registered investment advisers with a minimum
investment of $500,000 and (b) the trust departments of PNC Bank and its
affiliates (collectively, "PNC") on behalf of clients for whom PNC (i) acts in a
fiduciary capacity (excluding participant-direct employee benefit plans) or
otherwise has investment discretion or (ii) acts as custodian with respect to at
least $2,000,000 in assets, and individuals with a minimum investment of
$2,000,000. The minimum initial investment for institutions is $5,000. There is
no minimum subsequent investment requirement.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are
permissible investments for the Portfolios. The Fund does not accept third party
checks for initial or subsequent investments.
In the event that a shareholder acquiring Institutional Shares on or after
May 1, 1998 ceases to meet the eligibility standards for purchasing
Institutional Shares (other than due to fluctuations in market value), then the
shareholder's Institutional Shares will, upon the direction of the Fund's
distributor, automatically be converted to shares of another class of a
Portfolio having the same aggregate net asset value as the shares converted. If,
at the time of conversion, an institution offering Service Shares of the
Portfolio is acting on the shareholder's behalf, then the shareholder's
Institutional Shares will be converted to Service Shares of the Portfolio. If
not, then the shareholder's Institutional Shares will be converted to Investor A
Shares of the Portfolio. Service Shares are currently authorized to bear
additional service and processing fees at the aggregate annual rate of .30% of
average daily net assets, while Investor A Shares are currently authorized to
bear additional service, processing and distribution fees at the aggregate
annual rate of .50% of average daily net assets.
The Fund may in its discretion waive or modify the minimum investment
amount, may reject any order for Institutional Shares and may suspend and resume
the sale of shares of the Portfolios at any time.
Redemption of Shares. Payment for redeemed shares for which a redemption
order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is
normally made in Federal funds wired to the redeeming Institution on the next
Business Day, provided that the Fund's custodian is also open for business.
Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a
day when the Fund's custodian is closed is normally wired in Federal funds on
the next Business Day following
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redemption on which the Fund's custodian is open for business. The Fund reserves
the right to wire redemption proceeds within seven days after receiving a
redemption order if, in the judgment of BlackRock, an earlier payment could
adversely affect the Portfolios. No charge for wiring redemption payments is
imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be mailed
to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may also suspend the right of redemption or postpone the date of
payment upon redemption for such periods as are permitted under the 1940 Act,
and may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act.
Institutional Shares of the Portfolios may be purchased by customers of
broker-dealers and agents which have established a servicing relationship with
the Fund on behalf of their customers. These broker-dealers and agents may
impose additional or different conditions on the purchase or redemption of
Portfolio shares by their customers and may charge their customers transaction,
account or other fees on the purchase and redemption of Portfolio shares. Each
broker-dealer or agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of such broker-dealers or agents should consult them for information regarding
these fees and conditions.
Service Shares
Purchase of Shares. Purchase orders for the Portfolios may be placed by
telephoning PFPC at (800) 441-7450 no later than 12:00 noon (Eastern Time) on a
Business Day. Orders received before 12:00 noon (Eastern Time) will be executed
at 12:00 noon (Eastern Time). If payment for such orders is not received by 4:00
p.m. (Eastern Time), the order will be canceled and notice thereof will be given
to the Institution placing the order. Orders received after 12:00 noon (Eastern
Time) will not be accepted.
In the event that a shareholder acquiring Service Shares on or after May 1,
1998 (other than a former shareholder of The Compass Capital Group as described
above) ceases to meet the eligibility standards for purchasing Service Shares,
then the shareholder's Service Shares will, upon the direction of the Fund's
distributor, automatically be converted to Investor A Shares of the same
Portfolio having the same aggregate net asset value as the shares converted.
Investor A Shares are currently authorized to bear additional service and
distribution fees at the aggregate annual rate of .20% of average daily net
assets. In the event that a shareholder acquiring Service Shares on or after May
1, 1998 subsequently satisfies the eligibility standards for purchasing
Institutional Shares (other than due to fluctuations in market value), then the
shareholder's Service Shares will, upon the direction of the Fund's distributor,
automatically be converted to Institutional Shares of the Portfolio having the
same aggregate net asset value as the shares converted.
The Fund may in its discretion waive or modify the minimum investment
amount, may reject any order for Service Shares and may suspend and resume the
sale of shares of any Portfolio at any time.
Redemption of Shares. Payment for redeemed shares for which a redemption
order is received by PFPC before 12:00 noon (Eastern Time) on a Business Day is
normally made in Federal funds wired to the redeeming Institution on the same
Business Day, provided that the fund's custodian is also open for business.
Payment for redemption orders received between 12:00 noon (Eastern Time) and
4:00 p.m. (Eastern Time) or on a day when the Fund's custodian is closed is
normally wired in Federal funds on the next Business Day following redemption on
which the Fund's custodian is open for business. The Fund reserves the right to
wire redemption proceeds within seven days after receiving a redemption order
if, in the judgment of BlackRock, Inc., an earlier payment could adversely
affect the Portfolios. No charge for wiring redemption payments is imposed by
the Fund, although Institutions may charge their customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institution.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be mailed
to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may redeem Service Shares in any account if the account balance
drops below $5,000 as the result of redemption requests and the shareholder does
not increase the balance to at least $5,000 upon thirty days' written notice. If
a customer has agreed with an Institution to maintain a minimum balance in his
or her account with the Institution, and the balance in the account falls below
that minimum, the customer may be obligated to redeem all or part of his or her
shares in the Portfolio to the extent necessary to maintain the minimum balance
required.
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<PAGE>
The Fund may also suspend the right of redemption or postpone the date of
payment upon redemption for such periods as are permitted under the 1940 Act,
and may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act.
Except as noted below, a request for redemption must be signed by all
persons in whose names the shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the shareholder is a corporation, partnership, trust or
fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution. Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. Shareholders holding share certificates must
send their certificates with the redemption request. Additional documentary
evidence of authority is required by PFPC in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administer.
If shareholder has given authorization for expedited redemption, shares
can be redeemed by telephone and the proceeds sent by check to the shareholder
or by Federal wire transfer to a single previously designated bank account. Once
authorization is on file, PFPC will honor requests by any person by telephone at
(800) 441-7762 or other means. The minimum amount that may be sent by check is
$500, while the minimum amount that may be wired is $10,000. The Fund reserves
the right to change these minimums or to terminate these redemptions privileges.
If the proceeds of a redemption would exceed $25,000, the redemption request
must be in writing and will be subject to the signature guarantee requirement
described above. This privilege may not be used to redeem shares in certificated
form.
Persons who were shareholders of an investment portfolio of Compass
Capital Group of Funds at the time of the portfolio's combination with The PNC
Fund may also purchase and redeem Service Shares of the same Portfolio and for
the same account in which they held shares on that date through the procedures
described in this section.
Dividends and Distributions
The Portfolios will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to
investors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the end
of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by the Portfolio at least annually. The
period for which dividends are payable and the time for payment are subject to
change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and
fractional shares of the same class on which the distributions are paid, unless
a shareholder elects to receive distributions in cash. This election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
VALUATION OF PORTFOLIO SECURITIES
In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without limitation, a matrix or
formula method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith under the supervision
of the Board of Trustees.
Net asset value is calculated separately for each class of shares of the
Portfolios as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities,
cash and other assets owned by the Portfolios that are allocated to a particular
class of shares, less the liabilities charged to that class, by the total number
of outstanding shares of the class.
Valuation of securities held by the Portfolios is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities
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exchange or on the NASDAQ National Market System for which there were no sales
on that day and securities traded on other over-the-counter markets for which
market quotations are readily available are valued at the mean of the bid and
asked prices; an option or futures contract is valued at the last sales price
prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board
of trade on which such option or contract is traded, or in the absence of a
sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern
Time); and securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
Valuation of securities of foreign issuers is as follows: to the extent
sale prices are available, securities which are traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE. In the event that there are no sales, the
mean between the last available bid and asked prices will be used. If a security
is traded on more than one exchange, the latest sale price on the exchange where
the stock is primarily traded is used. An option or futures contract is valued
at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the
principal exchange or board of trade on which such option or contract is traded,
or in the absence of a sale, the mean between the last bid and asked prices
prior to 4:00 p.m. (Eastern Time). In the event that application of these
methods of valuation results in a price for a security which is deemed not to be
representative of the market value of such security, the security will be valued
by, under the direction of or in accordance with a method specified by the Board
of Trustees as reflecting fair value. The amortized cost method of valuation
will be used with respect to debt obligations with sixty days or less remaining
to maturity unless the investment adviser and/or sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value. All other assets and securities held by the Portfolios (including
restricted securities) are valued at fair value as determined in good faith by
the Board of Trustees or by someone under its direction. Any assets which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
Certain of the securities acquired by the Portfolios may be traded on
foreign exchanges or over-the-counter markets on days on which the Portfolios'
net asset value is not calculated. In such cases, the net asset value of the
Portfolios' shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Portfolios.
The Portfolios may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolios' securities.
PERFORMANCE INFORMATION
The Portfolios may quote performance in various ways. All performance
information supplied by the Portfolios in advertising is historical and is not
intended to indicate future returns.
Total Return. For purposes of quoting and comparing the performance of
shares of the Portfolios to the performance of other mutual funds and to stock
or other relevant indexes in advertisements, sales literature, communications to
shareholders and other materials, performance may be stated in terms of total
return. The total return for each class of the Portfolios will be calculated
independently of the other classes within that Portfolio. Under the rules of the
SEC, funds advertising performance must include total return quotes calculated
according to the following formula:
ERV 1/n
T = [(-----) - 1]
P
Where:
T = average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
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In calculating the ending redeemable value for Investor A Shares the
maximum front-end sales charge is deducted from the initial $1,000 payment and
all dividends and distributions by the particular Portfolio are assumed to have
been reinvested at net asset value on the reinvestment dates during the period.
In calculating the ending redeemable value for Investor B Shares the maximum
contingent deferred sales charge is deducted at the end of the period and all
dividends and distributions by the particular Portfolio are assumed to have been
reinvested at net asset value on the reinvestment dates during the period. In
calculating the ending redeemable value for Investor C Shares, the maximum
contingent deferred sales charge is deducted at the end of the period, and all
dividends and distributions by the particular Portfolio are assumed to have been
reinvested at net asset value on the reinvestment dates during the period. Total
return, or "T" in the formula above, is computed by finding the average annual
compounded rates of return over the specified periods that would equate the
initial amount invested to the ending redeemable value.
The Portfolios may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of each class of shares with other
performance measures. For example, in comparing the total return of shares with
data published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc. or Weisenberger Investment Company Service, or with the performance of the
Standard & Poor's 500 Stock Index, EAFE, the Dow Jones Industrial Average or the
Shearson Lehman Hutton Government Corporate Bond Index, as appropriate, the
Portfolios may calculate the aggregate total return for its shares of a certain
class for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in such shares and assuming the reinvestment
of each dividend or other distribution at net asset value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value. The Portfolios may not, for these purposes, deduct from the
initial value invested or the ending value any amount representing front-end and
deferred sales charges charged to purchasers of Investor A, Investor B or
Investor C Shares. The Investor A, Investor B and Investor C classes of the
Portfolios will, however, disclose, if appropriate, the maximum applicable sales
charges and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
In addition to average annual total returns, the Portfolios may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted on a before-tax or after-tax basis and may
be quoted with or without taking sales charges into account. Excluding the sales
charge from a total return calculation produces a higher total return figure.
Total returns, yields, and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Performance information for each class of shares may be quoted in
advertisements and communications to shareholders. Total return will be
calculated on an average annual total return basis for various periods. Average
annual total return reflects the average annual percentage change in value of an
investment in shares of an Equity or Bond Portfolio over the measuring period.
Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by the Portfolios with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolios with respect to a class of shares. When,
however, the Portfolios compare the total return of a share class to that of
other funds or relevant indices, total return may also be computed without
reflecting the sales load.
The performance of a class of a Portfolio's shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. The performance of a class of each of the
Portfolios' shares may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service, and to the performance of the Dow Jones Industrial Average, the
"stocks bonds and inflation Index" published annually by Ibbotson Associates,
the Lipper International Fund Index, the Lipper Small Cap International Fund
Index, the Lehman Corporate Bond Index and the Financial Times World Stock
Index. Performance information may also include evaluations of the Portfolios
and their share classes published by nationally recognized ranking services, and
information as reported in financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or regional
nature.
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In addition to providing performance information that demonstrates the
actual return of a class of shares, the Portfolios may provide other information
demonstrating hypothetical investment returns. This information may include, but
is not limited to, illustrating the compounding effects of dividends in a
dividend investment plan or the impact on tax-deferring investing.
Performance quotations for shares of the Portfolios represent past
performance and should not be considered representative of future results. The
investment return and principal value of an investment in the Portfolios will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data for
shares of the Portfolios cannot necessarily be used to compare an investment in
such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in the Portfolios, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other
institutions directly to their customer accounts in connection with investments
in shares will not be included in the Portfolios' performance calculations.
Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of the Portfolios over a specified period of time, the Fund
may provide certain other information demonstrating hypothetical investment
returns. Such information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend reinvestment plan or the impact
of tax-free investing. The Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in the Portfolios.
Miscellaneous. When comparing the Portfolios' performance to stock mutual
fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility.
From time to time, the Portfolios' performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example the Portfolios may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service that
rates mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of Portfolios to one another in appropriate categories
over specific periods of time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. The Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Portfolios' investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of the Portfolio would increase the value, not only of the
original investment in the Portfolio, but also of the additional shares received
through reinvestment. The Fund may also include discussions or illustrations of
the potential investment goals of a prospective investor, (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting, questionnaires designed to
help create a personal financial profile, worksheets used to project savings
needs based on assumed rates of inflation and hypothetical rates of return and
action plans offering investment alternatives) investment management techniques,
policies or investment suitability of the Portfolios (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments), economic and political conditions and the
relationship between sectors of the economy and the economy as a whole, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of the Portfolios), as well as the
views of the Portfolios' adviser and/or sub-advisers as to current market,
economy, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Portfolios. In addition, selected indices may be used to
illustrate historic performance of select asset classes. The Fund may also
include in advertisements, sales literature, communications to shareholders or
other materials, charts, graphs or drawings which
28
<PAGE>
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury bills and shares
of the Portfolios. In addition, advertisements, sales literature, shareholder
communications or other materials may include a discussion of certain attributes
or benefits to be derived by an investment in the Portfolios and/or other mutual
funds, benefits, characteristics or services associated with a particular class
of shares, shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternative to certificates of deposit and other financial instruments. Such
advertisements or communicators may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Materials may include lists of representative clients of the Portfolios'
investment adviser and sub-advisers. Materials may refer to the CUSIP numbers of
the various classes of the Portfolios and may illustrate how to find the
listings of the Portfolios in newspapers and periodicals. Materials may also
include discussions of other Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
The Portfolios may illustrate performance using moving averages. A
long-term moving average is the average of each week's adjusted closing NAV for
a specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Portfolios may compare these
measures to those of other funds. Measures of volatility seek to compare the
historical share price fluctuations or total returns to those of a benchmark.
Measures of benchmark correlation indicate how valid a comparative benchmark may
be. All measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate the Portfolios' price movements over specific
periods of time. Each point on the momentum indicator represents the Portfolios'
percentage change in price movements over that period.
The Portfolios may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. The Portfolios may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
The Portfolios may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Portfolios may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolios.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses is not intended as a substitute for careful tax
planning. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.
The Portfolios of the Fund has elected and intends to qualify for taxation
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). As a regulated investment company, the
Portfolios generally are exempt from federal income tax on its net investment
income (i.e., its investment company taxable income as that term is defined in
the Code without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of its net long-term capital gain over its net short-term
capital loss) that it distributes to shareholders, provided that it distributes
an amount equal to at least the sum of (a) 90% of its net investment income and
(b) 90% of its net tax-exempt interest income, if any, for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
that are described below.
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Distributions of net investment income and net tax-exempt interest income made
during the taxable year or, under specified circumstances, within twelve months
after the close of the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the Portfolios
must derive at least 90% of their gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each Portfolio intends to distribute to shareholders any of its net capital
gain for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.
Under current law, ordinary income of individuals will be taxable at a
maximum marginal rate of 39.6%, but because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. Under
recently enacted legislation, long-term capital gains of individuals are taxed
at a maximum rate of 20% with respect to capital assets held for more than one
year (10% for gains otherwise taxed at 15%). Capital gains and ordinary income
of corporate taxpayers are both taxed at a maximum nominal rate of 35%.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. Any loss incurred on the sale or exchange of the
Portfolio's shares, held six months or less, will be disallowed to the extent of
exempt interest dividends paid with respect to such shares, and any loss not so
disallowed will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares.
The Portfolios may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
Such transactions will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the
Portfolios (that is, may affect whether gains or losses are ordinary or
capital), accelerate recognition of income of the Portfolios and defer
recognition of certain of the Portfolios' losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. In
addition, these provisions (1) will require a Portfolio to "mark-to-market"
certain types of positions in its portfolio (that is, treat them as if they were
closed out) and (2) may cause the Portfolio to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the Distribution Requirement and avoid the 4% excise tax
(described below). Each Portfolio intends to monitor its transactions, will make
the appropriate tax elections and will make the appropriate entries in its books
and records when it acquires any option, futures contract, forward contract or
hedged investment in order to mitigate the effect of these rules.
If a Portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), such Portfolio may be subject to U.S. federal income tax on a
portion of any "excess distribution" or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on the
Portfolio in respect of deferred taxes arising from such distributions or gains.
If the Portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, the Portfolio can
elect to mark-to-market at the end of each taxable year its shares in a PFIC; in
this case, the Portfolio would recognize as ordinary income any increase in the
value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Portfolio might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the Distribution Requirement and would be taken into account for purposes of the
4% excise tax (described below).
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Investment income that may be received by a Portfolio from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle any such Portfolio to a reduced rate of, or exemption from, taxes on
such income. If more than 50% of the value of the total assets at the close of
the taxable year of the Portfolio consists of stock or securities of foreign
corporations, such Portfolio may elect to "pass through" to the Portfolio's
shareholders the amount of foreign taxes paid by such Portfolio. If the
Portfolio so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Portfolio, but would be treated as having paid his pro rata
share of such foreign taxes and would therefore be allowed to either deduct such
amount in computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
For purposes of the foreign tax credit limitation rules of the Code, each
shareholder would treat as foreign source income his pro rata share of such
foreign taxes plus the portion of dividends received from the Portfolio
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
In certain circumstances, a shareholder that (i) has held shares of the
Portfolio for less than a specified minimum period during which it is not
protected from risk of loss or (ii) is obligated to make payments related to the
dividends, will not be allowed a foreign tax credit for foreign taxes deemed
imposed on dividends paid on such shares. Additionally, such Portfolio must also
meet this holding period requirement with respect to its foreign stocks and
securities in order for "creditable" taxes to flow-through. Each shareholder
should consult his own tax adviser regarding the potential application of
foreign tax credits.
Ordinary income dividends paid by a Portfolio will qualify for the 70%
dividends-received deduction generally available to corporations to the extent
of the amount of "qualifying dividends" received by the Portfolio from domestic
corporations for the taxable year. A dividend received by the Portfolio will not
be treated as a qualifying dividend (i) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock) during the 90 day period beginning on the
date which is 45 days before the date on which such share becomes ex-dividend
with respect to such dividend (during the 180 day period beginning 90 days
before such date in the case of certain preferred stock), (ii) to the extent
that the Portfolio is under an obligation to make related payments with respect
to positions in substantially similar or related property or (iii) to the extent
the stock on which the dividend is paid is treated as debt-financed. Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
if the corporate shareholder fails to satisfy the foregoing requirements with
respect to its shares of the Portfolio.
If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
that he is not subject to backup withholding or that he is an "exempt
recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
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Portfolios may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of each class of the Portfolios of the Fund bear their pro rata
portion of all operating expenses paid by the Portfolios, except transfer agency
fees, certain administrative/servicing fees and amounts payable under the Fund's
Amended and Restated Distribution and Service Plan. Each share of the Portfolios
of the Fund has a par value of $.001, represents an interest in that Portfolio
and is entitled to the dividends and distributions earned on that Portfolio's
assets that are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held, and will vote in the aggregate and
not by class, except where otherwise required by law or as determined by the
Board of Trustees.
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment, shares will be fully paid and non-assessable by the
Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
The proceeds received by a Portfolio for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of the Portfolio will be segregated on the books of account, and will be charged
with the liabilities in respect to that Portfolio and with a share of the
general liabilities of the Fund. As stated herein, certain expenses of a
Portfolio may be charged to a specific class of shares representing interests in
that Portfolio.
The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i) sell
and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the liquidation and
termination of any Portfolio or class of shares. Upon any liquidation of the
Portfolio, Shareholders of each class of the Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.
32
<PAGE>
MISCELLANEOUS
The Fund. The Fund was organized as a Massachusetts business trust on
December 22, 1988 and is registered under the 1940 Act as an open end,
diversified management investment company. Effective January 31, 1998, the Fund
changed its name from Compass Capital Funds(SM) to BlackRock Funds(SM).
Counsel. The law firm of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York 10017, serves as the Fund's counsel.
Independent Accountants. PricewaterhouseCoopers LLP, with offices located
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania, serves as the Fund's
independent accountants.
On May __, 2000, PNC Bank, which has its principal offices at 1600 Market
Street, Philadelphia, Pennsylvania 19103, held of record approximately 72% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws of
the United States. All of the capital stock of PNC Bank is owned by PNC Bancorp,
Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp., a
publicly-held bank holding company.
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectuses, a "majority of the outstanding shares" of a class,
series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
33
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than
an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
A-1
<PAGE>
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature are
supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
A-2
<PAGE>
"C" - Obligations for which there is a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by Standard
& Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
A-3
<PAGE>
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
A-4
<PAGE>
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess one
of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "BBB" may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
A-5
<PAGE>
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and "CC"
the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-6
<PAGE>
APPENDIX B
----------
The Portfolios may enter into certain futures transactions. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in both
--------------------------------------
the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five business days after the trade. In the futures
market, only a contract is made to purchase or sell a bond in the future for a
set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, the Portfolio may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Portfolio could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
----------------------------------------------
contract sale would create an obligation by the Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Portfolio may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
With regard to the Portfolios, the Adviser also anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks or
-------
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the Standard & Poor's 100 or indexes based
on an industry or market indexes, such as Standard & Poor's 100 or indexes based
on an industry or market segment, such as oil and gas stocks. Futures
B-1
<PAGE>
contracts are traded on organized exchanges regulated by the Commodity Futures
Trading Commission. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract. With regard to a Portfolio, to the extent consistent with its
investment objective, the Adviser anticipates engaging in transactions, from
time to time, in foreign stock index futures such as the ALL-ORDS (Australia),
CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
The Portfolios may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the
Portfolio may purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Portfolio may also sell futures contracts in connection with this strategy,
in order to protect against the possibility that the value of the securities to
be sold as part of the restructuring of the Portfolio will decline prior to the
time of sale.
III. Futures Contracts on Foreign Currencies
---------------------------------------
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
different currencies arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with a custodian an amount of liquid assets known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Portfolio has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. Prior to expiration of the futures contract, the Adviser
may elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the
Portfolio's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not hedged
at all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Portfolio involved will experience either a loss or gain on the futures
which will not be completely offset by movements in the price of the instruments
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of instruments being hedged and movements in the price
of futures contracts, the Portfolio
B-2
<PAGE>
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of instruments being hedged if the volatility over a particular time
period of the prices of such instruments has been greater than the volatility
over such time period of the futures, or if otherwise deemed to be appropriate
by the Adviser. Conversely, the Portfolio may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by the
Adviser. It is also possible that, where the Portfolio has sold futures to hedge
its portfolio against a decline in the market, the market may advance and the
value of instruments held in the Portfolio may decline. If this occurred, the
Portfolio would lose money on the futures and also experience a decline in value
in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although a Portfolio
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge Portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Portfolio is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of
B-3
<PAGE>
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
VI. Options on Futures Contracts
----------------------------
a Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in anticipation of a decline in interest rates, the Portfolio may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio intends to purchase. Similarly, if the value of
the securities held by the Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities or
currencies being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities or currencies. In general, the market
prices of options can be expected to be more volatile than the market prices on
the underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs). The
writing of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-4
<PAGE>
BLACKROCK FUNDS(SM)
PART C
OTHER INFORMATION
Item 23. Exhibits
(1) Articles of Incorporation
(a) Declaration of Trust of the Registrant dated December 22, 1988 is
incorporated herein by reference to Exhibit (1)(a) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(b) Amendment No. 1 to Declaration of Trust dated May 4, 1989 is
incorporated herein by reference to Exhibit (1)(b) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(c) Amendment No. 2 to the Declaration of Trust dated December 23, 1993 is
incorporated herein by reference to Exhibit (1)(c) of Post- Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(d) Amendment No. 3 to the Declaration of Trust dated January 5, 1996 is
incorporated by reference to Exhibit 1(d) of Post-Effective Amendment
No. 23 to Registrant's Registration Statement on Form N-1A (No.
33-26305) filed on October 18, 1996.
(e) Amendment No. 4 to the Declaration of Trust dated December 23, 1997 is
incorporated herein by reference to Exhibit (1)(e) of Post- Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(2) By-laws
(a) Amended and Restated Code of Regulations of the Registrant is
incorporated herein by reference to Exhibit 2(a) of Post- Effective
Amendment No. 42 to Registrant's Registration Statement on Form N-1A
filed on June 11, 1999.
(3) Instruments Defining Rights of Security Holders
(a) Sections V, VIII and IX of Registrant's Declaration of Trust dated
December 22, 1988 are incorporated herein by reference to Exhibit
(1)(a)
<PAGE>
2
of Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998; Article II of
Registrant's Code of Regulations is incorporated herein by reference
to Exhibit (2) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(4) Investment Advisory Contracts
(a) Investment Advisory Agreement between Registrant and PNC Asset
Management Group, Inc. relating to all Portfolios except the
Multi-Sector Mortgage Securities Portfolio III and Index Equity
Portfolio is incorporated herein by reference to Exhibit (5)(a) of
Post-Effective Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Investment Advisory Agreement between Registrant and BlackRock
Financial Management, Inc. with respect to the Multi-Sector Mortgage
Securities Portfolio III is incorporated herein by reference to
Exhibit (5)(b) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(c) Addendum No. 1 to Investment Advisory Agreement between Registrant and
PNC Asset Management Group, Inc. with respect to the Mid-Cap Value
Equity and Mid-Cap Growth Equity Portfolios is incorporated herein by
reference to Exhibit 5(c) of Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A filed on January 28,
1997.
(d) Form of Addendum No. 1 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect to
BlackRock Strategic Portfolio I and BlackRock Strategic Portfolio II
is incorporated herein by reference to Exhibit 5(d) of Post-Effective
Amendment No. 26 to Registrant's Registration Statement on Form N-1A
filed on December 18, 1996.
(e) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to the
International Small Cap Equity Portfolio is incorporated herein by
reference to Exhibit 5(e) of Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed on August 19,
1997.
(f) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
BlackRock Financial Management, Inc. with respect to the Managed
Income, Tax-Free Income, Intermediate Government Bond, Ohio Tax-Free
<PAGE>
3
Income, Pennsylvania Tax-Free Income, Low Duration Bond, Intermediate
Bond, Government Income, New Jersey Tax-Free Income and Core Bond
Portfolios is incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(g) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
Provident Capital Management, Inc. with respect to the Large Cap Value
Equity, Small Cap Value Equity and Select Equity Portfolios is
incorporated herein by reference to Exhibit (5)(c) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-1A
filed on May 30, 1996.
(h) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
PNC Equity Advisors Company with respect to the Large Cap Growth
Equity and Small Cap Growth Equity Portfolios is incorporated herein
by reference to Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on May 30,
1996.
(i) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
PNC Institutional Management Corporation with respect to the Money
Market, U.S. Treasury Money Market, Municipal Money Market,
Pennsylvania Municipal Money Market, Ohio Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios is incorporated
herein by reference to Exhibit (5)(c) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed on May
30, 1996.
(j) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
CastleInternational Asset Management Limited with respect to the
International Equity and International Emerging Markets Portfolios is
incorporated herein by reference to Exhibit (5)(c) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-1A
filed on May 30, 1996.
(k) Sub-Advisory Agreement among PNC Asset Management Group, Inc.,
Provident Capital Management, Inc. and BlackRock Financial Management,
Inc. with respect to the Balanced Portfolio is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on May 30,
1996.
(l) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
Provident Capital Management, Inc. with respect to the Mid-Cap
<PAGE>
4
Value Equity Portfolio is incorporated herein by reference to Exhibit
5(k) of Post-Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.
(m) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
PNC Equity Advisors Company with respect to the Mid-Cap Growth Equity
Portfolio is incorporated herein by reference to Exhibit 5(l) of Post-
Effective Amendment No. 27 to Registrant's Registration Statement on
Form N-1A filed on January 28, 1997.
(n) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
BlackRock Financial Management, Inc. with respect to the International
Bond Portfolio is incorporated herein by reference to Exhibit 5(m) of
Post- Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.
(o) Form of Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and CastleInternational Asset Management Limited with respect to
the International Small Cap Equity Portfolio is incorporated herein by
reference to Exhibit 5(o) of Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed on August 19,
1997.
(p) Form of Addendum No. 3 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to the
Micro- Cap Equity Portfolio, GNMA Portfolio, Delaware Tax-Free Income
Portfolio and Kentucky Tax-Free Income Portfolio is incorporated
herein by reference to Exhibit (5)(p) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(q) Form of Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Equity Advisors Company with respect to the Micro-Cap
Equity Portfolio is incorporated herein by reference to Exhibit (5)(q)
of Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.
(r) Form of Sub-Advisory Agreement between BlackRock, Inc. and BlackRock
Financial Management, Inc. with respect to the GNMA, Delaware Tax-Free
Income and Kentucky Tax-Free Income Portfolios is incorporated herein
by reference to Exhibit (5)(r) of Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A filed on February 13,
1998.
<PAGE>
5
(s) Form of Addendum No. 4 to Investment Advisory Agreement between
Registrant and BlackRock Advisors, Inc. with respect to the High Yield
Bond Portfolio is incorporated herein by reference to Exhibit 5(s) of
Post- Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A filed on August 7, 1998.
(t) Form of Sub-Advisory Agreement between BlackRock Advisors, Inc. and
BlackRock Financial Management, Inc. with respect to the High Yield
Bond Portfolio is incorporated herein by reference to Exhibit 5(t) of
Post- Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A filed on August 7, 1998.
(u) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect to
the Multi-Sector Mortgage Securities Portfolio IV is incorporated
herein by reference to Exhibit 4(u) of Post-Effective Amendment No. 42
to Registrant's Registration Statement on Form N-1A filed on June 11,
1999.
(v) Form of Addendum No. 5 to Investment Advisory Agreement between
Registrant and BlackRock Advisors, Inc. with respect to the Global
Science & Technology, European Equity and Asia Pacific Equity
Portfolios to be filed by amendment.
(w) Form of Sub-Advisory Agreement between BlackRock Advisors, Inc. and
BlackRock Financial Management, Inc. with respect to the Global
Science & Technology Portfolio to be filed by amendment.
(x) Form of Sub-Advisory Agreement between BlackRock Advisors, Inc. and
BlackRock International, Ltd. with respect to the European Equity and
Asia Pacific Equity Portfolios to be filed by amendment.
(5) Underwriting Contracts
(a) Distribution Agreement between Registrant and BlackRock Distributors,
Inc. dated as of June 25, 1999 is incorporated herein by reference to
Exhibit 5(a) of Post-Effective Amendment No. 45 to Registrant's
Registration Statement on Form N-1A filed on August 24, 1999.
(b) Form of Appendix A to Distribution Agreement between Registrant and
BlackRock Distributors, Inc. is incorporated herein by reference to
Exhibit 5(b) of Post-Effective Amendment No. 45 to Registrant's
Registration Statement on Form N-1A filed on August 24, 1999.
<PAGE>
6
(6) Bonus or Profit Sharing Contracts
None.
(7) Custodian Agreements
(a) Custodian Agreement dated October 4, 1989 between Registrant and PNC
Bank, National Association is incorporated herein by reference to
Exhibit (8)(a) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(b) Amendment No. 1 to Custodian Agreement between Registrant and PNC
Bank, National Association is incorporated herein by reference to
Exhibit (8)(b) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(c) Amendment No. 2 dated March 1, 1993 to Custodian Agreement between
Registrant and PNC Bank, National Association with respect to the
Short-Term Bond, Intermediate-Term Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (8)(c) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(d) Form of Appendix B to Custodian Agreement between Registrant and PFPC
Trust Company is incorporated herein by reference to Exhibit 7(d) of
Post-Effective Amendment No. 42 to Registrant's Registration Statement
on Form N-1A filed on June 11, 1999.
(e) Sub-Custodian Agreement dated April 27, 1992 among the Registrant, PNC
Bank, National Association and The Chase Manhattan Bank is
incorporated herein by reference to Exhibit (8)(e) of Post-Effective
Amendment No. 34 to Registrant's Registration Statement on Form N-1A
filed on February 13, 1998.
(f) Global Custody Agreement between Barclays Bank PLC and PNC Bank,
National Association dated October 28, 1992 is incorporated herein by
reference to Exhibit (8)(f) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on January 27,
1998.
(g) Custodian Agreement between State Street Bank and Trust Company and
PNC Bank, National Association dated June 13, 1983 is incorporated
herein by reference to Exhibit (8)(g) of Post- Effective Amendment No.
34
<PAGE>
7
to Registrant's Registration Statement on Form N-1A filed on February
13, 1998.
(h) Amendment No. 1 to Custodian Agreement between State Street Bank and
Trust Company and PNC Bank, National Association dated November 21,
1989 is incorporated herein by reference to Exhibit (8)(h) of Post-
Effective Amendment No. 34 to Registrant's Registration Statement on
Form N-1A filed on February 13, 1998.
(i) Subcustodial Services Agreement dated January 10, 1996 between PNC
Bank, National Association and Citibank, N.A. is incorporated herein
by reference to Exhibit 8(j) of Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A filed on January 28,
1997.
(8) Other Material Contracts
(a) Form of Administration Agreement among Registrant, BlackRock Advisors,
Inc. and PFPC Inc. is incorporated herein by reference to Exhibit 8(a)
of Post-Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A filed on June 11, 1999.
(b) Forms of Appendix A and Appendix B to Administration Agreement among
Registrant, BlackRock Advisors, Inc. and PFPC Inc. are incorporated
herein by reference to Exhibit 8(b) of Post-Effective Amendment No. 44
to Registrant's Registration Statement on Form N-1A filed on August
11, 1999.
(c) Transfer Agency Agreement dated October 4, 1989 between Registrant and
PFPC Inc. is incorporated herein by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 33 to Registrant's Registration Statement
on Form N-1A filed on January 27, 1998.
(d) Amendment No. 1 to Transfer Agency Agreement dated October 4, 1989
between Registrant and PFPC Inc. relating to the Tax-Free Income
Portfolio is incorporated herein by reference to Exhibit (9)(f) of
Post- Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.
(e) Amendment No. 2 to Transfer Agency Agreement dated October 4, 1989
between Registrant and PFPC Inc. relating to the Pennsylvania
Municipal Money Market, Ohio Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Large
Cap Value Equity, Index Equity and Small Cap Value Equity Portfolios
is incorporated herein by reference to Exhibit (9)(g) of
Post-Effective
<PAGE>
8
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(f) Amendment No. 3 to Transfer Agency Agreement dated October 4, 1989
between Registrant and PFPC Inc. relating to the Short-Term Bond,
Intermediate-Term Bond, Core Equity, Small Cap Growth Equity and North
Carolina Municipal Money Market Portfolios is incorporated herein by
reference to Exhibit (9)(h) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on January 27,
1998.
(g) Amendment No. 4 to Transfer Agency Agreement dated October 4, 1989
between Registrant and PFPC Inc. relating to Series B Investor Shares
of the Money Market, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Large
Cap Value Equity, Large Cap Growth Equity, Index Equity, Small Cap
Value Equity, Intermediate-Term Bond, Small Cap Growth Equity, Core
Equity, International Fixed Income, Government Income, International
Emerging Markets, International Equity and Balanced Portfolios is
incorporated herein by reference to Exhibit (9)(i) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(h) Form of Appendix C to Transfer Agency Agreement between Registrant and
PFPC Inc. is incorporated herein by reference to Exhibit 8(h) of
Post-Effective Amendment No. 42 to Registrant's Registration Statement
on Form N-1A filed on June 11, 1999.
(i) License Agreement dated as of December 1, 1995 between the Registrant
and Compass Capital Group, Inc. is incorporated herein by reference to
Exhibit 9(q) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28, 1997.
(j) Share Acquisition Agreement dated April 29, 1998 by and among
Registrant and PNC Bank, National Association and PNC Bank, Delaware,
respectively, each as trustee for certain of the common trust funds
listed therein is incorporated herein by reference to Exhibit 9(l) of
Post- Effective Amendment No. 36 to Registrant's Registration
Statement on Form N-1A filed on April 29, 1998.
(k) Form of Expense Limitation Agreement dated as of January 28, 1999
between Registrant and BlackRock Advisors, Inc. is incorporated herein
by reference to Exhibit 8(k) of Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A filed on January 28,
1999.
<PAGE>
9
(9) Legal Opinion
(a) Opinion of Counsel to be filed by amendment.
(10) Other Opinions
(a) None.
(11) Omitted Financial Statements
(a) None.
(12) Initial Capital Agreements
(a) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes A-1, B-1, C-1, D-2, E-2, F-2, G- 2,
H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2, N-2, O-2, P-2, D-1, E- 1, F-1,
G-1, H-1, K-1, L-1, M-1, N-1, O-1, P-1, A-2, B-2, C-2, I- 2, J-2, A-3,
B-3, C-3, D-3, E-3, F-3, G-3, H-3, I-3, J-3, K-3, L- 3, M-3, N-3, O-3,
P-3, Q-1, Q-2, Q-3, R-1, R-2, R-3, S-1, S-2, S- 3, T-1, T-2, T-3, U-1,
U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4, K- 4, L-4, M-4, N-4, O-4, P-4,
R-4, S-4, T-4, U-4, W-4, X-4, Y-4, V- 1, V-2, V-3, W-1, W-2, W-3, X-1,
X-2, X-3, Y-1, Y-2, Y-3, Z-1, Z- 2, Z-3, AA-1, AA-2, AA-3, AA-4, AA-5,
BB-1, BB-2, BB-3, BB-4, BB- 5, CC-3, A-5, B-4, B-5, C-4, C-5, I-4,
I-5, J-4, J-5, Q-4, Q-5, V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5,
G-5, H-5, K-5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5,
Y-5, DD-1, DD- 2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5, R-6,
BB-6, FF- 3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1, II-2, II-3,
II-4, II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5, KK-1, KK-2, KK-3, KK-4,
KK-5, LL-1, LL-2, LL-3, LL-4 and LL-5 is incorporated herein by
reference to Exhibit (13)(a) of Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A filed on February 13,
1998.
(b) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes MM-1, MM-2, MM-3, MM-4, MM-5 and MM-6
is incorporated herein by reference to Exhibit 13(b) of Post-Effective
Amendment No. 37 to Registrant's Registration Statement on Form N-1A
filed on August 7, 1998.
(c) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Class NN-3 is incorporated herein by reference
to Exhibit 12(c) of Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-1A filed on June 11, 1999.
<PAGE>
10
(d) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes A-7 and C-7 is incorporated herein by
reference to Exhibit 12(d) of Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A filed on August 6,
1999.
(c) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes OO-1, OO-2, OO-3, OO-4 and OO-5 to be
filed by amendment.
(f) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes PP-1, PP-2, PP-3, PP-4 and PP-5, QQ-1,
QQ- 2, QQ-3, QQ-4, QQ-5 and U-6 to be filed by amendment.
(13) Rule 12b-1 Plan
(a) Amended and Restated Distribution and Service Plan for Service, Series
A Investor, Series B Investor, Series C Investor, Institutional and
BlackRock Shares is incorporated herein by reference to Exhibit (15)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(b) Form of Appendix A to Amended and Restated Distribution and Service
Plan is incorporated herein by reference to Exhibit 13(b) of Post-
Effective Amendment No. 44 to Registrant's Registration Statement on
Form N-1A filed on August 11, 1999.
(14) Intentionally Omitted.
(15) Rule 18f-3 Plan
(a) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of a
Multi-Class Distribution System is incorporated herein by reference to
Exhibit 15(a) of Post-Effective Amendment No. 45 to Registrant's
Registration Statement on Form N-1A filed on August 24, 1999.
(16) Codes of Ethics
(a) Code of Ethics of BlackRock Funds
(b) Code of Ethics of BlackRock, Inc.
(c) Code of Ethics of BlackRock Distributors, Inc.
<PAGE>
11
(99) (a) Power of Attorney of David R. Wilmerding dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.
(b) Power of Attorney of William O. Albertini dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.
(c) Power of Attorney of Raymond J. Clark dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.
(d) Power of Attorney of Robert M. Hernandez dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.
(e) Power of Attorney of Anthony M. Santomero dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.
Item 24. Persons Controlled by or under Common Control with the Fund.
None.
Item 25. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit 5(a). Indemnification of Registrant's Custodian,
Transfer Agent and Administrators is provided for, respectively, in Section 22
of the Custodian Agreement incorporated by reference herein as Exhibit 7(a),
Section 17 of the Transfer Agency Agreement incorporated by reference herein as
Exhibit 8(c) and Section 11 of the Administration Agreement incorporated by
reference herein as Exhibit 8(a). Registrant intends to obtain from a major
insurance carrier a trustees' and officers' liability policy covering certain
types of errors and omissions. In addition, Section 9.3
<PAGE>
12
of the Registrant's Declaration of Trust incorporated by reference herein as
Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
--------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter disposed of by a
compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of bad faith had been
adjudicated, it would in the opinion of such counsel have been adjudicated
in favor of such person. The rights accruing to any person under these
provisions shall not exclude any other right to which he may be lawfully
entitled, provided that no person may satisfy any right of indemnity or
reimbursement hereunder except out of the property of the Trust. The
Trustees may make advance payments in connection with the indemnification
under this Section 9.3, provided that the indemnified person shall have
given a written undertaking to reimburse the Trust in the event it is
subsequently determined that he is not entitled to such indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
<PAGE>
13
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned
by such Shareholder to be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust shall, upon request
by the Shareholder, assume the defense of any claim made against any
Shareholder for any act or obligations of the Trust and satisfy any
judgment thereon from such assets.
Item 26. Business and Other Connections of Investment Advisers
(a) BlackRock Advisors, Inc. is an indirect majority-owned subsidiary
of PNC Bank Corp. BlackRock Advisors, Inc. was organized in 1994 for the purpose
of providing advisory services to investment companies. The list required by
this Item 26 of officers and directors of BlackRock Advisors, Inc., together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by such officers and directors during the past
two years, is incorporated by reference to Schedules A and D of Form ADV, filed
by BlackRock Advisors, Inc. pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-47710).
(b) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation) ("BIMC") is an indirect majority-owned
subsidiary of PNC Bank Corp. The list required by this Item 26 of officers and
directors of BIMC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by BIMC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-13304).
(c) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
majority-owned subsidiary of PNC Bank Corp. BlackRock currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. The list required
by this Item 26 of officers and directors of BlackRock, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of Form ADV, filed by
BlackRock pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-
48433).
(d) BlackRock International, Ltd. (formerly CastleInternational Asset
Management Limited) ("BIL") is an indirect majority-owned subsidiary of PNC Bank
Corp. The list required by this Item 26 of officers and directors of BIL,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and
<PAGE>
14
D of Form ADV, filed by BIL pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-51087).
Item 27. Principal Underwriters
(a) Not applicable.
(b) The information required by this Item 27 with respect to each
director, officer or partner of BlackRock Distributors, Inc. (formerly Compass
Distributors, Inc.) is incorporated by reference to Schedule A of FORM BD filed
by BlackRock Distributors, Inc. with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (File No. 8-48775).
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) PFPC Trust Company, 200 Stevens Drive, Lester, PA 19113 (records
relating to its functions as custodian).
(2) BlackRock Distributors, Inc., Four Falls Corporate Center, 6th
Floor, West Conshohocken, PA 19428-2961 (records relating to its
functions as distributor).
(3) BlackRock Advisors, Inc. (formerly BlackRock, Inc.), 345 Park
Avenue, New York, New York 10154 (records relating to its
functions as investment adviser and co-administrator).
(4) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation), Bellevue Corporate Center,
400 Bellevue Parkway, Wilmington, Delaware 19809 (records
relating to its functions as investment sub-adviser).
(5) BlackRock Financial Management, Inc., 345 Park Avenue, New York,
New York 10154; and 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its functions as
investment adviser and sub-adviser).
(6) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its functions as
co- administrator, transfer agent and dividend disbursing agent).
<PAGE>
15
(7) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas, New
York, New York 10019 (records relating to its function as sub-
custodian).
(8) BlackRock International, Ltd. (formerly CastleInternational Asset
Management Limited), 7 Castle Street, Edinburgh, Scotland, EH2
3AM (records relating to its functions as investment
sub-adviser).
(9) Citibank, N.A., 111 Wall Street, 23rd Floor, Zone 6, New York, NY
10043 (records relating to its functions as sub-custodian).
(10) BlackRock Financial Management, Inc., 1600 Market Street, 28th
Floor, Philadelphia, PA 19103 (Registrant's declaration of trust,
code of regulations and minute books).
Item 29. Management Services
None.
Item 30. Undertakings
None.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of New York and the State of New York
on the 23rd day of March, 2000.
BLACKROCK FUNDS(SM)
Fund
By /s/ Raymond J. Clark
----------------------------------
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Raymond J. Clark Trustee, President and
- -------------------------- Treasurer
(Raymond J. Clark) March 23, 2000
*David R. Wilmerding, Jr. Chairman of the Board March 23, 2000
- -------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of the Board March 23, 2000
- -------------------------
(Anthony M. Santomero)
*William O. Albertini Trustee March 23, 2000
- -------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee March 23, 2000
- -------------------------
(Robert M. Hernandez)
*By: /s/ Karen H. Sabath
------------------------------------------
Karen H. Sabath, Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
16(a) Code of Ethics of BlackRock Funds
16(b) Code of Ethics of BlackRock, Inc.
16(c) Code of Ethics of BlackRock Distributors, Inc.
<PAGE>
Exhibit 99.16(a)
COMPASS CAPITAL FUNDS(R)
(the "Fund")
CODE OF ETHICS
--------------
I. Legal Requirement.
-----------------
Rule 17j-1(a) under the Investment Company Act of 1940, as amended (the
"1940 Act"), makes it unlawful for any officer or trustee of the Fund in
connection with the purchase or sale by such person of a security "held or to be
acquired" by the Fund:
1. To employ any device, scheme or artifice to defraud the Fund;
2. To make to the Fund any untrue statement of a material fact or
omit to state to the Fund a material fact necessary in order to
make the statements made, in light of the circumstances under
which they are made, not misleading;
3. To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon the Fund; or
4. To engage in any manipulative practice with respect to the Fund's
investment portfolios.
II. Purpose of the Code of Ethics.
-----------------------------
The Fund expects that its officers and trustees will conduct their personal
investment activities in accordance with (1) the duty at all times to place the
interests of the Fund's shareholders first, (2) the requirement that all
personal securities transactions be conducted consistent with this Code of
Ethics and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and responsibility,
and (3) the fundamental standard that investment company personnel should not
take inappropriate advantage of their positions.
In view of the foregoing, the provisions of Section 17(j) of the 1940 Act,
the "Report of the Advisory Group on Personal Investing" issued by the
Investment Company Institute on May 9, 1994 and the Securities and Exchange
Commission's September 1994
<PAGE>
Report on "Personal Investment Activities of Investment Company Personnel," the
Fund has determined to adopt this Code of Ethics on behalf of the Fund to
specify a code of conduct for certain types of personal securities transactions
which might involve conflicts of interest or an appearance of impropriety, and
to establish reporting requirements and enforcement procedures.
III. Definitions.
-----------
A. An "Access Person" means: (1) each trustee or officer of the Fund; (2)
each employee (if any) of the Fund (or of any company in a control
relationship to the Fund) who, in connection with his or her regular
functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund or whose
functions relate to the making of any recommendations with respect to
such purchases or sales; and (3) any natural person in a control
relationship to the Fund who obtains information concerning
recommendations made to the Fund with regard to the purchase or sale
of a security.
For purposes of this Code of Ethics, an "Access Person" does not
include any person who is subject to the securities transaction
pre-clearance requirements and securities transaction reporting
requirements of the Code of Ethics adopted by the Fund's investment
adviser, sub-advisers or principal underwriter in compliance with Rule
17j-1 of the 1940 Act and Rule 204-2(a)(12) of the Investment Advisers
Act of 1940 or Section 15(f) of the Securities Exchange Act of 1934,
as applicable.
B. "Restricted Trustee" or "Restricted Officer" means each trustee or
officer of the Fund who is not also a trustee, officer, partner,
employee or controlling person of the Fund's investment adviser,
custodian, transfer agent, or distributor, or of any sub-adviser or
administrator of the Fund.
C. An Access Person's "immediate family" includes a spouse, minor
children and adults living in the same household as the Access Person.
D. A security is "held or to be acquired" if within the most recent 15
days it (1) is or has been held by the Fund, or (2) is being or has
been considered by the Fund, its investment adviser or a sub-adviser
for purchase by the Fund. A purchase or sale includes the writing of
an option to purchase or sell.
-2-
<PAGE>
E. "Exempt Security" means:
1. Securities which the Fund's investment portfolios are not
permitted to purchase under the investment objectives and
policies set forth in the Fund's then current prospectus(es)
under the Securities Act of 1933 or the Fund's registration
statement on Form N-1A.
2. Securities issued by the Government of the United States (i.e.,
U.S. Treasury securities), short-term debt securities which are
"government securities" within the meaning of section 2(a)(16) of
the 1940 Act (which includes securities of the U.S. Government
and its instrumentalities), bankers' acceptances, bank
certificates of deposit, commercial paper, and shares of
registered open-end investment companies.
3. Securities issued by any company included in the Standard and
Poor's 500 Stock Index and in an amount less than $10,000.
4. Securities purchased or sold in any account over which the Access
Person has no direct or indirect influence or control.
5. Securities purchased or sold in a transaction which is
non-volitional on the part of either the Access Person or the
Fund.
6. Securities acquired as a part of an automatic dividend
reinvestment plan.
7. Securities acquired upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
the extent such rights were acquired from such issuer, and sales
of such rights so acquired.
IV. Policies of the Fund Regarding Personal Securities Transactions.
---------------------------------------------------------------
A. General Policy.
--------------
No Access Person of the Fund shall engage in any act, practice or
course of business that would violate the provisions of Rule 17j-1(a)
set forth above, or in connection with any personal investment
activity, engage in conduct inconsistent with this Code of Ethics.
-3-
<PAGE>
B. Specific Policies.
-----------------
1. Restrictions on Personal Securities Transactions By Access
----------------------------------------------------------
Persons Other Than Restricted Trustees and Restricted Officers.
--------------------------------------------------------------
a. No Access Person who is not a Restricted Trustee or
Restricted Officer may buy or sell securities other than
Exempt Securities for his or her personal portfolio or the
portfolio of a member of his or her immediate family without
obtaining oral authorization from the Compliance Officer of
the Fund's investment adviser prior to effecting such
-----
security transaction.
A written authorization for such security transaction will
be provided by the investment adviser's Compliance Officer
to the person receiving the authorization (if granted) and
to PFPC Inc. ("PFPC") to memorialize the oral authorization
that was granted.
Note: If an Access Person has questions as to whether
purchasing or selling a security for his or her personal
portfolio or the portfolio of a member of his or her
immediate family requires prior oral authorization, the
Access Person should consult the investment adviser's
Compliance Officer for clearance or denial of clearance to
trade prior to effecting any securities transactions.
-----
b. Pre-clearance approval under paragraph (a) will expire at
the close of business on the trading day after the date on
which oral authorization is received, and the Access Person
is required to renew clearance for the transaction if the
trade is not completed before the authority expires.
c. No clearance will be given to an Access Person other than a
Restricted Trustee or Restricted Officer to purchase or sell
any security (1) on a day when any portfolio of the Fund has
a pending "buy" or "sell" order in that same security until
that order is executed or withdrawn or (2) when the
Compliance Officer has been advised by the investment
adviser or a sub-adviser that the same security is being
-4-
<PAGE>
considered for purchase or sale for any portfolio of the
Fund.
2. Restrictions on Personal Securities Transactions by Restricted
--------------------------------------------------------------
Trustees and Restricted Officers.
--------------------------------
The Fund recognizes that a Restricted Trustee and a Restricted
Officer do not have on-going, day-to-day involvement with the
operations of the Fund. In addition, it has been the practice of
the Fund to give information about securities purchased or sold
by the Fund or considered for purchase or sale by the Fund to
Restricted Trustees and Restricted Officers in materials
circulated more than 15 days after such securities are purchased
or sold by the Fund or are considered for purchase or sale by the
Fund. Accordingly, the Fund believes that less stringent controls
are appropriate for Restricted Trustees and Restricted officers,
as follows:
a. The securities pre-clearance requirement contained in
paragraph IV.B.1.a. above shall only apply to a Restricted
Trustee or Restricted Officer if he or she knew or, in the
ordinary course of fulfilling his or her official duties as
a trustee or officer, should have known, that during the
fifteen day period before the transaction in a security
other than an Exempt Security or at the time of the
transaction that the security purchased or sold by him or
her other than an Exempt Security was also purchased or sold
by the Fund or considered for the purchase or sale by the
Fund.
b. If the pre-clearance provisions of the preceding paragraph
apply, no clearance will be given to a Restricted Trustee or
Restricted Officer to purchase or sell any security (1) on a
day when any portfolio of the Fund has a pending "buy" or
"sell" order in that same security until that order is
executed or withdrawn or (2) when the Compliance Officer has
been advised by the investment adviser or a sub-adviser that
the same security is being considered for purchase or sale
for any portfolio of the Fund.
-5-
<PAGE>
V. Procedures.
----------
A. In order to provide the Fund with information to enable it to
determine with reasonable assurance whether the provisions of this
Code are being observed by its Access Persons:
1. Each Access Person of the Fund other than a Restricted Trustee or
Restricted Officer shall direct his or her broker to supply to
the Compliance Officer of PFPC, on a timely basis, duplicate
copies of confirmations of all securities transactions in which
the person has, or by reason of such transaction acquires any
direct or indirect beneficial ownership[1] and copies of periodic
statements for all securities accounts.
2. Each Access Person of the Fund, other than a trustee who is not
an "interested person" (as defined in the 1940 Act), shall submit
reports in the form attached hereto as Exhibit A to PFPC, showing
all transactions in securities other than Exempt Securities in
which the person has, or by reason of such transaction acquires,
any direct or indirect
- --------------
1. You will be treated as the "beneficial owner" of a security under this policy
only if you have a direct or indirect pecuniary interest in the security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly, to profit, or to share the profit, from the transaction.
(b) An indirect pecuniary interest is any non-direct financial interest,
but is specifically defined in the rules to include securities held by
members of your immediate family sharing the same household;
securities held by a partnership of which you are a general partner;
securities held by a trust of which you are the settlor if you can
revoke the trust without the consent of another person, or a
-------------------------------------
beneficiary if you have or share investment control with the trustee;
and equity securities which may be acquired upon exercise of an option
or other right, or through conversion.
For interpretive guidance on this test, you should consult counsel.
-6-
<PAGE>
beneficial ownership.(2) Such reports shall be filed no later than 10
days after the end of each calendar quarter.
3. Each trustee who is not an "interested person" of the Fund shall
submit the same quarterly report as required under paragraph 2 to
PFPC, but only for a transaction in a security other than an Exempt
Security where he or she knew at the time of the transaction or, in
the ordinary course of fulfilling his or her official duties as a
trustee or officer, should have known that during the 15-day period
immediately preceding or after the date of the transaction, such
security is or was purchased or sold, or considered for purchase or
sale, by the Fund.
4. PFPC shall notify each Access Person of the Fund who may be required
to make reports pursuant to this Code that such person is subject to
this reporting requirement and shall deliver a copy of this Code to
each such person.
5. PFPC shall review the reports received, and as appropriate compare the
reports with the pre-clearance authorization received, and report to
the Fund's Board of Trustees ("Board"):
a. with respect to any transaction that appears to evidence a
possible violation of this Code; and
b. apparent violations of the reporting requirement stated herein.
6. The Board shall consider reports made to it hereunder and shall
determine whether the policies established in Sections IV and V
of this Code of Ethics have been violated, and what sanctions, if
any, should be imposed on the violator, including but not limited
to a letter of censure, suspension or termination of the
employment of the violator, or the unwinding of the transaction
and requiring such person to disgorge any profits to the Fund.
The Board shall review the operation of this Code of Ethics at
least once a year.
7. The Fund's investment adviser, sub-advisers and principal
underwriter shall adopt, maintain and
- --------------
2. See footnote 1 above.
-7-
<PAGE>
enforce separate codes of ethics with respect to their personnel
in compliance with Rule 17j-1 and Rule 204-2(a)(12) of the
Investment Advisers Act of 1940 or Section 15(f) of the
Securities Exchange Act of 1934, as applicable, and shall forward
to PFPC and the Fund's counsel copies of such codes and all
future amendments and modifications thereto.
8. At each quarterly Board of Trustees' meeting, the investment
adviser, sub-advisers and principal underwriter of the Fund shall
report to the Fund's Board of Trustees:
a. any reported securities transaction that occurred during the
prior quarter that may have been inconsistent with the
provisions of the codes of ethics adopted by the Fund's
investment adviser, sub-advisers or principal underwriter;
and
b. all disciplinary actions3 taken in response to such
violations.
9. At least once a year, the Fund's investment adviser, sub-advisers
and principal underwriter shall provide to the Board a report
which contains (a) a summary of existing procedures concerning
personal investing by advisory persons and any changes in the
procedures during the past year and (b) an evaluation of current
compliance procedures and a report on any recommended changes in
existing restrictions or procedures based upon the Fund's
experience under this Code of Ethics, industry practices, or
developments in applicable laws and regulations.
10. This Code, the codes of the investment adviser, sub-advisers and
principal underwriter, a copy of each report by an Access Person,
any written report hereunder by PFPC, the Fund's investment
adviser, sub-advisers or principal underwriter and lists of all
persons required to make reports shall be preserved with the
Fund's records for the period required by Rule 17j-1.
- ---------------
3. Disciplinary action includes, but is not limited to, any action that has a
material financial effect upon the employee, such as fining, suspending, or
demoting the employee, imposing a substantial fine or requiring such person to
disgorge profits.
-8-
<PAGE>
VI. Certification.
-------------
Each Access Person will be required to certify annually that he or she has
read and understood this Code of Ethics, and will abide by them. Each Access
Person will further certify that he has disclosed or reported all personal
securities transactions required to be disclosed or reported under the Code of
Ethics. A form of such certification is attached hereto as Exhibit B.
The Board of Trustees of Compass Capital
Funds(R)
Date: January 27, 1995
-9-
<PAGE>
Exhibit A
Compass Capital Funds
Securities Transaction Report
For the Calendar Quarter Ended _______________________
(month/day/year)
To: PFPC Inc., as Co-Administrator of Compass Capital Funds(R) (the "Fund")
During the quarter referred to above, the following transactions were
effected in securities of which I had, or by reason of such transactions
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics of the Fund:
<TABLE>
<CAPTION>
Number of Nature of Broker/Dealer
Shares or Dollar Amount Transaction or Bank
Date of Principal of (Purchase, Through Whom
Security Transaction Amount Transaction Sale, Other) Price Effected
- -------- ----------- -------- ------------- ------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
This report (i) excludes transactions with respect to which I had no direct
or indirect influence or control, (ii) excludes other transactions not required
to be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the securities listed above.
Signature:
-----------------
Print Name:
----------------
A-1
<PAGE>
Exhibit B
Compass Capital Funds(R)
ANNUAL CERTIFICATE
Pursuant to the requirements of the Code of Ethics of Compass Capital
Funds[R] (the "Fund"), the undersigned hereby certifies as follows:
1. I have read the Fund's Code of Ethics.
2. I understand the Code of Ethics and acknowledge that I am subject to
it.
3. Since the date of the last Annual Certificate (if any) given pursuant
to the Code of Ethics, I have reported all personal securities
transactions required to be reported under the requirements of the
Code of Ethics.
Date: ______________________
Print Name
______________________
Signature
B-1
<PAGE>
Exhibit 99.16(b)
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
For
BLACKROCK, INC.
And
ITS AFFILIATED COMPANIES
Effective March 1, 2000
<PAGE>
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
TABLE OF CONTENTS
TABLE OF CONTENTS..................................................... i
I. PREAMBLE.......................................................... 1
A. General Principles........................................... 1
B. The General Scope Of The Policy's Application To Personal
Investment Transactions...................................... 3
C. The Organization Of This Policy.............................. 3
D. Questions.................................................... 4
II. PERSONAL INVESTMENT TRANSACTIONS.................................. 4
A. In General................................................... 4
B. Reporting Obligations........................................ 4
1. Use Of Broker-Dealers And Futures Commission Merchants.. 4
2. Initial Report.......................................... 4
3. New Accounts............................................ 5
4. Timely Reporting Of Investment Transactions............. 6
5. Related Accounts........................................ 6
6. Exemptions From Reporting............................... 6
C. Prohibited Or Restricted Investment Transactions............. 7
1. Initial Public Offerings................................ 7
2. Private Placements...................................... 7
D. Investment Transactions Requiring Prior Notification......... 7
1. Prior Notification Procedure............................ 8
2. Exemptions From Prior Notification...................... 8
(a) Transactions Exempt From Prior Notification........ 9
(b) Securities Exempt From Prior Notification.......... 9
(c) Futures Contracts Exempt From Prior Notification... 9
<PAGE>
E. Ban On Short-Term Trading Profits.......................... 10
F. Blackout Periods........................................... 10
1. Specific Blackout Periods............................. 10
2. Exemptions From Blackout Restrictions................. 11
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR.................... 11
A. Inside Information......................................... 11
B. Service As A Director...................................... 12
IV. EXEMPTIONS...................................................... 12
V. COMPLIANCE...................................................... 13
A. Certifications............................................. 13
1. Upon Receipt Of This Policy........................... 13
2. Annual Certificate Of Compliance...................... 13
B. Supervisory Procedures..................................... 14
1. The Compliance Committee.............................. 14
2. The Compliance Officer................................ 14
3. Post-Trade Monitoring And Investigations.............. 14
4. Remedial Actions...................................... 15
5. Reports Of Violations Requiring Significant Remedial
Action................................................ 15
6. Annual Reports........................................ 15
VI. EFFECTIVE DATE.................................................. 16
Appendices
- ----------
I. Definitions Of Capitalized Terms
II. Acknowledgment Of Receipt Of The Policy
III. Annual Certification Of Compliance With The Policy
IV. Initial Report Of Accounts
V. Request For Duplicate Broker Reports
VI. Investment Transaction Prior Notification Form
VII. Fully Discretionary Account Form
-ii-
<PAGE>
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
FOR BLACKROCK, INC. AND
ITS AFFILIATED COMPANIES
I. PREAMBLE
A. General Principles
This Employee Investment Transaction Policy (the "Policy") is based on the
principle that you, as an officer, director or other Advisory Employee of an
Advisor affiliated with BlackRock, Inc. ("BlackRock"), owe a fiduciary duty of
undivided loyalty to the registered investment companies, institutional
investment clients, personal trusts and estates, guardianships, employee benefit
trusts, and other Advisory Clients which that Advisor serves./1/ Accordingly,
you must avoid transactions, activities, and relationships that might interfere
or appear to interfere with making decisions in the best interests of those
Advisory Clients.
At all times, you must observe the following general principles:
1. You must place the interests of Advisory Clients first. As a
fiduciary you must scrupulously avoid serving your own personal
interests ahead of the interests of Advisory Clients. You must adhere
to this general fiduciary principle as well as
- ----------
1 This Policy uses a number of capitalized terms, e.g., Advisor, Advisory
Client, Advisory Employee, Beneficial Ownership, Exempt Security, Fixed Income
Security, Fully Discretionary Account, Futures Contract, Immediate Family,
Investment Transaction, Personal Account, Portfolio Employee, Portfolio Manager,
Related Account, and Security. The first time a capitalized term is used, a
definition is stated in the text or in a footnote. The full definitions of these
capitalized terms are set forth in Appendix I. To understand your
responsibilities under the Policy, it is important that you review and
understand all of the definitions of capitalized terms in Appendix I. As
indicated in Appendix I:
The term "Advisor" means any entity affiliated with BlackRock, whether
now in existence or formed after the date hereof, that is registered as (i)
an investment advisor under the Investment Advisers Act of 1940, as
amended, or (ii) a broker-dealer under the Securities Exchange Act of 1934,
as amended, other than any such investment advisor or broker-dealer that
has adopted its own employee investment transaction policy.
The term "Advisory Client" means a registered investment company, an
institutional investment client, a personal trust or estate, a
guardianship, an employee benefit trust, or another client with which the
Advisor by which you are employed or with which you are associated has an
investment management, advisory or sub-advisory contract or relationship.
The term "Advisory Employee" means an officer, director, or employee
of an Advisor, or any other person identified as a "control person" on the
Form ADV or the Form BD filed by the Advisor with the U.S. Securities and
Exchange Commission, (1) who, in connection with his or her regular
functions or duties, generates, participates in, or obtains information
regarding that Advisor's purchase or sale of a Security by or on behalf of
an Advisory Client; (2) whose regular functions or duties relate to the
making of any recommendations with respect to such purchases or sales; (3)
who obtains information or exercises influence concerning investment
recommendations made to an Advisory Client of that Advisor; or (4) who has
line oversight or management responsibilities over employees described in
(1), (2) or (3), above.
<PAGE>
comply with the Policy's specific provisions. Technical compliance with the
Policy will not automatically insulate from scrutiny any Investment
Transaction/2/ that indicates an abuse of your fiduciary duties or that
creates an appearance of such abuse.
Your fiduciary obligation applies not only to your personal Investment
Transactions but also to actions taken on behalf of Advisory Clients. In
particular, you may not cause an Advisory Client to take action, or not to
take action, for your personal benefit rather than for the benefit of the
Advisory Client. For example, you would violate this Policy if you caused
an Advisory Client to purchase a Security you owned for the purpose of
increasing the value of that Security. If you are a Portfolio Employee,/3/
you would also violate this Policy if you made a personal investment in a
Security that might be an appropriate
- ----------
2 For purposes of this Policy, the term "Investment Transaction" means any
transaction in a Security or Futures Contract in which you have, or by reason of
the transaction will acquire, a Beneficial Ownership interest.
As a general matter, the term "Security" means any stock, note, bond,
debenture or other evidence of indebtedness (including any loan participation or
assignment), limited partnership interest or investment contract other than an
Exempt Security (as defined above). The term "Security" includes an option on a
Security, an index of Securities, a currency or a basket of currencies,
including such an option traded on the Chicago Board of Options Exchange or on
the New York, American, Pacific or Philadelphia Stock Exchanges as well as such
an option traded in the over-the-counter market. The term "Security" does not
include a physical commodity or a Futures Contract.
The term "Futures Contract" includes (a) a futures contract and an option
on a futures contract traded on a U.S. or foreign board of trade, such as the
Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile
Exchange, or the London International Financial Futures Exchange (a
"Publicly-Traded Futures Contract"), as well as (b) a forward contract, a
"swap", a "cap", a "collar", a "floor" and an over-the-counter option (other
than an option on a foreign currency, an option on a basket of currencies, an
option on a Security or an option on an index of Securities) (a
"Privately-Traded Futures Contract").
As a general matter, you are considered to have a "Beneficial Ownership"
interest in a Security or Futures Contract if you have the opportunity, directly
or indirectly, to profit or share in any profit derived from a transaction in
that Security or Futures Contract. You are presumed to have a Beneficial
Ownership interest in any Security or Futures Contract held, individually or
jointly, by you and/or by a member of your Immediate Family (as defined below).
In addition, unless specifically excepted by the Compliance Officer based on a
showing that your interest or control is sufficiently attenuated to avoid the
possibility of a conflict, you will be considered to have a Beneficial Ownership
interest in a Security held by: (1) a joint account to which you are a party,
(2) a partnership in which you are a general partner, (3) a limited liability
company in which you are a manager-member, (4) a trust in which you or a member
of your Immediate Family has an interest or (5) an investment club in which you
are a member.
See Appendix I for more complete definitions of the terms "Beneficial
Ownership," "Futures Contract," and "Security."
3 The term "Portfolio Employee" means a Portfolio Manager or an Advisory
Employee who provides information or advice to a Portfolio Manager, who helps
execute a Portfolio Manager's decisions, or who directly supervises a Portfolio
Manager. The term "Portfolio Manager" means any employee of an Advisor who has
the authority, whether sole or shared or only from time to time, to make
investment decisions or to direct trades affecting an Advisory Client.
-2-
<PAGE>
investment for an Advisory Client without first considering the
Security as an investment for the Advisory Client.
2. You must conduct all of your personal Investment Transactions in
full compliance with this Policy, the PNC Code of Ethics, and the
other policies of PNC Bank Corp. ("PNC") (including the policies that
prohibit insider trading or that restrict trading in PNC Securities).
BlackRock encourages you and your family to develop personal
investment programs. However, those investment programs must remain
within boundaries reasonably necessary to insure that appropriate
safeguards exist to protect the interests of our Advisory Clients and
to avoid even the appearance of unfairness or impropriety. Doubtful
situations should be resolved in favor of our Advisory Clients and
against your personal Investment Transactions.
3. You must not take inappropriate advantage of your position. The
receipt of investment opportunities, perquisites, gifts or gratuities
from persons seeking to do business, directly or indirectly, with
BlackRock, an affiliate, or an Advisory Client could call into
question the independence of your business judgment. Doubtful
situations should be resolved against your personal interests.
B. The General Scope Of The Policy's Application To Personal Investment
Transactions
Rule 17j-1 under the Investment Company Act of 1940, as amended, requires
reporting of all personal Investment Transactions in Securities (other than
certain "Exempt Securities") by Advisory Employees, whether or not they are
Securities that might be purchased or sold by or on behalf of an Advisory
Client. This Policy implements that reporting requirement.
However, since a primary purpose of the Policy is to avoid conflicts of
interest arising from personal Investment Transactions in Securities and other
instruments that are held or might be acquired on behalf of Advisory Clients,
this Policy only places restrictions on personal Investment Transactions in such
investments. This Policy also requires reporting and restricts personal
Investment Transactions in certain Futures Contracts which, although they are
not Securities, are instruments that Advisors buy and sell for Advisory Clients.
Although this Policy applies to all officers, directors and other Advisory
Employees of BlackRock, the Policy recognizes that Portfolio Managers, and the
other Portfolio Employees who provide them with advice and who execute their
decisions, occupy more sensitive positions than other Advisory Employees, and
that it is appropriate to subject their personal Investment Transactions to
greater restrictions.
C. The Organization Of This Policy
The remainder of this Policy is divided into four main topics. Section II
concerns personal investment transactions. Section III describes restrictions
that apply to Advisory Employees who receive inside information or seek to serve
on a board of directors or similar governing body. Section IV outlines the
procedure for seeking case-by-case exemptions from the Policy's requirements.
Section V summarizes the methods for ensuring compliance under this Policy. In
addition, the following Appendices are also a part of this Policy:
I. Definitions Of Capitalized Terms
II. Acknowledgment Of Receipt Of The Policy
-3-
<PAGE>
III. Annual Certification Of Compliance With The Policy
IV. Initial Report Of Accounts
V. Request For Duplicate Broker Reports
VI. Investment Transaction Prior Notification Form
VII. Fully Discretionary Account Form
D. Questions
Questions regarding this Policy should be addressed to the Compliance
Officer. If you have any question regarding the interpretation of this Policy or
its application to a potential Investment Transaction, you should consult the
Compliance Officer before you execute that transaction.
II. PERSONAL INVESTMENT TRANSACTIONS
A. In General
Subject to the limited exceptions described below, you are required to
report all Investment Transactions in Securities and Futures Contracts made by
you, a member of your Immediate Family, a trust or an investment club in which
you have an interest, or on behalf of any account in which you have an interest
or which you direct./4/ In addition, you must provide prior notification of
certain Investment Transactions in Securities and Futures Contracts that an
Advisor holds or may acquire on behalf of an Advisory Client. (The exercise of
an option is an Investment Transaction for purposes of these requirements.) The
details of these reporting and prior notification requirements are described
below.
B. Reporting Obligations
1. Use Of Broker-Dealers And Futures Commission Merchants
You must use a registered broker-dealer or futures commission merchant to
engage in any purchase or sale of a publicly traded Security or Futures
Contract. This requirement also applies to any purchase or sale of a Security or
Futures Contract in which you have, or by reason of the Investment Transaction
will acquire, a Beneficial Ownership interest. Thus, as a general matter, any
Securities or Futures Contract transactions by members of your Immediate Family
will need to be made through a registered broker-dealer or futures commission
merchant.
2. Initial Report
Within 10 days of commencing employment or within 10 days of any event that
causes you to become subject to this Policy, you must supply to the Compliance
Officer copies of the most recent statements for each and every Personal Account
and Related Account that holds or is
- ----------
4 The term "Immediate Family" means any of the following persons who reside in
your household or who depend on you for basic living support: your spouse, any
child, stepchild, grandchild, parent, stepparent, grandparent, sibling, mother-
in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law, including any adoptive relationships.
-4-
<PAGE>
likely to hold a Security or Futures Contract in which you have a Beneficial
Ownership interest, as well as copies of confirmations for any and all
transactions subsequent to the effective dates of those statements./5/ These
documents should be supplied to the Compliance Officer by attaching them to the
form attached hereto as Appendix IV.
On that same form you should supply the name of any registered
broker-dealer and/or futures commission merchant and the number for any Personal
Account and Related Account that holds or is likely to hold a Security or
Futures Contract in which you have a Beneficial Ownership interest for which you
cannot supply the most recent account statement. You must also certify, where
indicated on the form, that the contents of the form and the documents attached
thereto disclose all such Personal Accounts and Related Accounts.
In addition, you must also supply, where indicated on the form, the
following information for each Security or Futures Contract in which you have a
Beneficial Ownership interest, to the extent that this information is not
available from the statements attached to the form:
1. A description of the Security or Futures Contract, including its
name or title;
2. The quantity (e.g., in terms of numbers of shares, units or
contracts) and value (in dollars) of the Security or Futures
Contract; and
3. The custodian of the Security or Futures Contract.
3. New Accounts
Upon the opening of a new Personal Account or a Related Account that holds
or is likely to hold a Security or a Futures Contract in which you have a
Beneficial Ownership interest, you
- ----------
5 The term "Personal Account" means the following accounts that hold or are
likely to hold a Security or Futures Contract in which you have a Beneficial
Ownership interest:
. any account in your individual name;
. any joint or tenant-in-common account in which you have an interest or
are a participant;
. any account for which you act as trustee, executor, or custodian; and
. any account over which you have investment discretion or have the
power (whether or not exercised) to direct the acquisition or
disposition of Securities or Futures Contracts (other than an Advisory
Client's account that you manage or over which you have investment
discretion), including the accounts of any individual or entity that
is managed or controlled directly or indirectly by or through you,
such as the account of an investment club to which you belong. There
is a presumption that you can control accounts held by members of your
Immediate Family sharing the same household. This presumption may be
rebutted only by convincing evidence.
The term "Related Account" means any account, other than a Personal
Account, that holds a Security or Futures Contract in which you have a direct or
indirect Beneficial Ownership interest (other than an account over which you
have no investment discretion and cannot otherwise exercise control) and any
account (other than an Advisory Client's account) of any individual or entity to
whom you give advice or make recommendations with regard to the acquisition or
disposition of Securities or Futures Contracts (whether or not such advice is
acted upon).
-5-
<PAGE>
must give written notice to the Compliance Officer of the name of the registered
broker-dealer or futures commission merchant for that account, the identifying
number for that Personal Account or Related Account and the date that the
account was established.
4. Timely Reporting Of Investment Transactions
You must cause each broker-dealer or futures commission merchant that
maintains a Personal Account or a Related Account that holds a Security or a
Futures Contract in which you have a Beneficial Ownership interest to provide to
the Compliance Officer, on a timely basis, duplicate copies of confirmations of
all transactions in that account and of periodic statements for that account
("Duplicate Broker Reports"). A form for that purpose is attached hereto as
Appendix V.
In addition, you must report to the Compliance Officer, on a timely basis, any
transaction in a Security or Futures Contract in which you have or acquired a
Beneficial Ownership interest that was made without the use of a registered
broker-dealer or futures commission merchant.
5. Related Accounts
The reporting obligations described above also apply to any Related Account
(as defined in Appendix I) and to any Investment Transaction in a Related
Account.
It is important that you recognize that the definitions of "Personal
Account," "Related Account" and "Beneficial Ownership" in Appendix I probably
will require you to provide, or to arrange for the broker-dealer or futures
commission merchant to furnish, copies of reports for any account used by or for
a member of your Immediate Family or a trust in which you or a member of your
Immediate Family has an interest, as well as for any other accounts in which you
may have the opportunity, directly or indirectly, to profit or share in the
profit derived from any Investment Transaction in that account, including the
account of any investment club to which you belong.
6. Exemptions From Reporting
You need not report Investment Transactions in any account, including a
Fully Discretionary Account,/6/ over which neither you nor an Immediate Family
Member has or had any direct or indirect influence or control. For example,
Investment Transactions in the account of your spouse in an employee benefit
plan would not have to be reported if neither you nor your spouse has any
influence or control over those Investment Transactions.
You also need not report Investment Transactions in Exempt Securities nor
need you furnish, or require a broker-dealer or futures commission merchant to
furnish, copies of
- ----------
6 The term "Fully Discretionary Account" means a Personal Account or Related
Account managed or held by a broker-dealer, futures commission merchant,
investment advisor or trustee as to which neither you nor an Immediate Family
Member: (a) exercises any investment discretion; (b) suggests or receives notice
of transactions prior to their execution; and (c) you do not otherwise has any
direct or indirect influence or control. In addition, to qualify as a Fully
Discretionary Account, the individual broker, registered representative or
merchant responsible for that account must not be responsible for nor receive
advance notice of any purchase or sale of a Security or Futures Contract on
behalf of an Advisory Client. To qualify an account as a Fully Discretionary
Account, the Compliance Officer must receive and approve a written notice, in
the form attached hereto as Appendix VIII, that the account meets the foregoing
qualifications as a Fully Discretionary Account.
-6-
<PAGE>
confirmations or periodic statements for accounts that hold only Exempt
Securities./7/ This includes accounts that only hold U.S. Government securities,
money market interests, or shares in registered open-end investment companies
(i.e., mutual funds). This exemption from reporting will end immediately,
however, at such time as there is an Investment Transaction in that account in a
Security that is not an Exempt Security.
C. Prohibited Or Restricted Investment Transactions
1. Initial Public Offerings
As an Advisory Employee, you may not acquire Beneficial Ownership of any
Security in an initial public offering, except that, with the approval of the
Compliance Committee and the General Counsel of BlackRock, you may acquire
Beneficial Ownership of a Security in an initial public offering directed or
sponsored by BlackRock. For purposes of this Policy, an initial public offering
shall not include the purchase of a Security in an initial public offering by
(i) a savings bank to its depositors, (ii) a mutual insurance company to its
- --
policyholders, (iii) an issuer of debt securities (other than debt securities
---
convertible into common or preferred stock) or (iv) with respect to an Advisory
--
Employee employed by BlackRock International, Ltd. a building society to its
depositors.
2. Private Placements
If you are a Portfolio Employee, you may not acquire Beneficial Ownership
of any Security in a private placement, or subsequently sell that interest,
unless you have received the prior written approval of the Compliance Officer
and of any supervisor designated by the Compliance Officer. Approval will not be
given unless a determination is made that the investment opportunity should not
be reserved for one or more Advisory Clients, and that the opportunity to invest
has not been offered to you by virtue of your position with an Advisor.
If you have acquired Beneficial Ownership of Securities in a private
placement, you must disclose that investment to your supervisor when you play a
part in any consideration of any investment by an Advisory Client in the issuer
of the Securities, and any decision to make such an investment must be
independently reviewed by a Portfolio Manager who does not have a Beneficial
Ownership interest in any Securities of the issuer.
D. Investment Transactions Requiring Prior Notification
You must give prior notification to the Compliance Officer of any
Investment Transaction in Securities or Futures Contracts in a Personal Account
or Related Account, or in
- ----------
7 The term "Exempt Security" means any Security (as defined in
Appendix I) not included within the definition of Security in SEC Rule
17j-1(e)(5) under the Investment Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies (i.e., mutual
funds); and
3. High quality short-term debt instruments, including, but not limited
to, bankers' acceptances, bank certificates of deposit, commercial
paper and repurchase agreements.
See Appendix I for a more complete definition of "Exempt Security."
-7-
<PAGE>
which you otherwise have or will acquire a Beneficial Ownership
interest, unless that Investment Transaction, Security or Futures Contract falls
into one of the following categories that are identified as "exempt from prior
notification." The purpose of prior notification is to permit the Compliance
Officer and the Compliance Committee to take reasonable steps to investigate
whether that Investment Transaction is in accordance with this Policy.
Satisfaction of the prior notification requirement does not, however, constitute
approval or authorization of any Investment Transaction for which you have given
prior notification. As a result, the primary responsibility for compliance with
this Policy rests with you.
1. Prior Notification Procedure
Prior notification must be given by completing and submitting to the
Compliance Officer a copy of the prior notification form attached hereto as
Appendix VII. No Investment Transaction requiring prior notification may be
executed prior to notice by the Compliance Officer that the prior notification
process has been completed. The time and date of that notice will be reflected
on the prior notification form. Unless otherwise specified, an Investment
Transaction requiring prior notification must be placed and executed by the end
of trading in New York City or, in the case of Advisory Employees employed by
BlackRock International, Ltd., by the end of trading in the United Kingdom on
the day of notice from the Compliance Officer that the prior notification
process has been completed. If a proposed Investment Transaction is not executed
(with the exception of a limit order) within the time specified, you must repeat
the prior notification process before executing the transaction. A notice from a
Compliance Officer that the prior notification process has been completed is no
longer effective if you discover, prior to executing your Investment
Transaction, that the information on your prior notification form is no longer
accurate, or if the Compliance Officer revokes his or her notice for any other
reason.
The Compliance Officer may undertake such investigation as he or she
considers necessary to investigate whether an Investment Transaction for which
prior notification has been sought complies with the terms of this Policy and is
consistent with the general principles described at the beginning of this
Policy.
As part of that investigation, the Compliance Officer or a designee of the
Compliance Officer will determine whether there is a pending buy or sell order
in the same equity Security or Futures Contract, or a Related Security, on
behalf of an Advisory Client./8/ If such an order exists, the Compliance Officer
will not provide notice that the prior notification process has been completed
until the Advisory Client's order is executed or withdrawn.
2. Exemptions From Prior Notification
Prior notification will not be required for the following Investment
Transactions, Securities and Futures Contracts. They are exempt only from the
Policy's prior notification requirement, and, unless otherwise indicated, remain
subject to the Policy's other requirements, including its reporting
requirements.
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8 The term "Related Security" means, as to any Security, any instrument related
in value to that Security, including, but not limited to, any option or warrant
to purchase or sell that Security, and any Security convertible into or
exchangeable for that Security.
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(a) Transactions Exempt From Prior Notification
Prior notification is not required for any of the following Investment
Transactions:
1. Any Investment Transaction in a Fully Discretionary Account that has
been approved as such by the Compliance Officer.
2. Purchases of Securities under dividend reinvestment plans.
3. Purchases of Securities by an exercise of rights issued to the holders
of a class of Securities pro rata, to the extent those rights are
issued with respect to Securities of which you have Beneficial
Ownership.
4. Acquisitions or dispositions of Securities as the result of a stock
dividend, stock split, reverse stock split, merger, consolidation,
spin-off or other similar corporate distribution or reorganization
applicable to all holders of a class of Securities of which you have
Beneficial Ownership.
5. Purchases of common stock of PNC Bank Corp. under the Employee Stock
Purchase Plan.
6. With respect to Advisory Employees who are employed by BlackRock
International, Inc., automatic investments by direct debit into a
personal equity plan (PEP), or similar type of plan in Exempt
Securities if the pre- notification process was completed for the
first such investment.
7. Investment Transactions made by a person who serves on the Board of
Directors of an Advisor and is not involved with the Advisory
operations of such Advisor nor engages in the type of activities
described under (1) (2) or (3) under the term Advisory Employee as
defined in Appendix I.
(b) Securities Exempt From Prior Notification
Prior notification is not required for an Investment Transaction in an
Exempt Security, as defined in Appendix I, e.g., U.S. Government securities,
shares in registered open-end investment companies (i.e., mutual funds) and
"high quality short-term debt instruments" (as defined in Appendix I).
(c) Futures Contracts Exempt From Prior Notification
Prior notification is not required for an Investment Transaction in the
following Futures Contracts:
1. Currency futures.
2. U.S. Treasury futures.
3. Eurodollar futures.
4. Physical commodity futures (e.g., contracts for future delivery of
----
grain, livestock, fiber or metals).
5. Futures contracts to acquire Fixed Income Securities issued by a U.S.
Government agency, a foreign government, or an international or
supranational agency.
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6. Futures contracts on the Standard and Poor's 500 (S&P 500) or the Dow
Jones Industrial Average stock indexes.
7. For Advisory Employees who are employed by BlackRock International,
Ltd., futures contracts on the Financial Times Stock Exchange 100
(FTSE) Index.
E. Ban On Short-Term Trading Profits
You may not profit from the purchase and sale, or the sale and purchase,
within 60 calendar days, of the same Securities and/or Related Security. Any
such short-term trade must be reversed or unwound, or if that is not practical,
the profits must be disgorged and distributed in a manner determined by the
Compliance Committee.
This short-term trading ban does not apply to Investment Transactions in
Exempt Securities (as defined in Appendix I) or in Futures Contracts. This ban
also does not apply to a purchase or sale in connection with a Transaction
Exempt From Prior Notification (as described above in Section II.D.2.(a)), a
transaction in a Fully Discretionary Account or a transaction exempt from the
"blackout" periods pursuant to Section II.F.2 below.
You are considered to profit from a short-term trade if Securities of which
you have Beneficial Ownership (including Securities held by Immediate Family
members) are sold for more than their purchase price, even though the Securities
purchased and the Securities sold are held of record or beneficially by
different persons or entities.
F. Blackout Periods
Your ability to engage in certain Investment Transactions may be prohibited
or restricted during the "blackout" periods described below:
1. Specific Blackout Periods
a. You may not purchase or sell a Security, a Related Security,
or Futures Contract at a time when you intend or know of
another's intention to purchase or sell that same Security,
a Related Security, or Futures Contract, on behalf of an
Advisory Client of any Advisor (the "Specific Knowledge
Blackout Period").
b. In addition, if you are a Portfolio Employee, you may not
purchase or sell a Security, a Related Security or a Futures
Contract which you are actively considering or which you
have actively considered and rejected for purchase or sale
for an Advisory Client within the previous 15 calendar days
(the "15-Day Blackout Period") unless the Compliance
Officer, after consultation with your supervisor, has
approved your Investment Transaction./9/
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9 SEC Rule 17j-1 places restrictions on the purchase or sale of any "security
held or to be acquired" by a registered investment company. Rule 17j-1(e)(6)
defines a "security held or to be acquired" by a registered investment company
as including any security which, within the most recent 15 days, "is being or
has been considered by such company or its investment adviser for purchase by
such company."
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c. Finally, if you are a Portfolio Manager, you may not
purchase or sell a Security, a Related Security, or Futures
Contract within 7 calendar days before or after a
transaction in that Security, a Related Security, or Futures
Contract, by an Advisory Client for which you are
responsible (the "7-Day Blackout Period").
For Portfolio Employees or Portfolio Managers, the Compliance Officer will
not give such notice until any applicable 15-Day Blackout Period or 7-Day
Blackout Period has expired or any required approvals or exemptions have been
obtained. An Investment Transaction that violates one of these Blackout
restrictions must be reversed or unwound, or if that is not practical, the
profits must be disgorged and distributed in a manner determined by the
Compliance Committee.
2. Exemptions From Blackout Restrictions
The foregoing blackout period restrictions do not apply to Investment
Transactions in:
a. Exempt Securities, as defined in Appendix I.
b. Securities of a company listed on the Standard & Poor's 100 (S & P
100) Index.
c. A Futures Contract Exempt From Prior Notification under this Policy
(as described above).
d. A Fully Discretionary Account.
e. With respect to Advisory Employees who are employed by BlackRock
International, Ltd., securities of a company listed on the Financial
Times Stock Exchange 100 (FTSE 100).
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR
A. Inside Information
As an employee of a subsidiary of PNC, you must comply with the PNC Insider
Trading Policy. A copy of that policy is included in Section E of the PNC Code
of Ethics. In addition, as an Advisory Employee, you must notify the General
Counsel of BlackRock if you receive or expect to receive material non-public
information about an entity that issues securities. The General Counsel will
determine the restrictions, if any, that will apply to your communications and
activities while in possession of that information. In general, those
restrictions will include:
1. An undertaking not to trade, either on your own behalf or on
behalf of an Advisory Client, in the securities of the entity
about which you have material non-public information.
2. An undertaking not to disclose material non-public information
to other Advisory Employees.
3. An undertaking not to participate in discussions with or
decisions by other Advisory Employees relating to the entity
about which you have material non-public information.
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The General Counsel, in cooperation with the Compliance Officer, will maintain a
"restricted list" of entities about which Advisory Employees may have material
non-public information. This "restricted list" will be available to the
Compliance Officer when he or she conducts investigations or reviews related to
the Prior Notification Procedure described previously in Section II(D)(1) or the
Post-Trade Monitoring process described below in Section V(B)(3).
B. Service As A Director
You may not serve on the board of directors or other governing board of any
entity unless you have received the prior written approval of the General
Counsel of PNC, to the extent such approval is required under the terms of the
PNC Code of Ethics, and the General Counsel of BlackRock. If permitted to serve
on a governing board, an Advisory Employee will be isolated from those Advisory
Employees who make investment decisions regarding the securities of that entity,
through a "Chinese wall" or other procedures determined by the General Counsel
of BlackRock. In general, the "Chinese wall" or other procedures will include:
1. An undertaking not to trade or to cause a trade on behalf of an
Advisory Client in the securities of the entity on whose board
you serve.
2. An undertaking not to disclose material non-public information
about that entity to other Advisory Employees.
3. An undertaking not to participate in discussions with or
decisions by other Advisory Employees relating to the entity on
whose board you serve.
Any entity on whose board an Advisory Employee serves will be included on the
"restricted list" referenced in subsection A, above.
IV. EXEMPTIONS
The Compliance Committee, in its discretion, may grant case-by-case
exceptions to any of the foregoing requirements, restrictions or prohibitions,
except that the Compliance Committee may not exempt any Investment Transaction
in a Security (other than an Exempt Security) or a Futures Contract from the
Policy's reporting requirements. Exemptions from the Policy's prior notification
requirements and from the Policy's restrictions on acquisitions in initial
public offerings, short-term trading and trading during blackout periods will
require a determination by the Compliance Committee that the exempted
transaction does not involve a realistic possibility of violating the general
principles described at the beginning of this Policy. An application for a
case-by-case exemption, in accordance with this paragraph, should be made in
writing to the Compliance Officer, who will promptly forward that written
request to the members of the Compliance Committee.
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V. COMPLIANCE
A. Certifications
1. Upon Receipt Of This Policy
Upon commencement of your employment or the effective date of this Policy,
whichever occurs later, you will be required to acknowledge receipt of your copy
of this Policy by completing and returning to the Compliance Officer a copy of
the form attached hereto as Appendix II. By that acknowledgment, you will also
agree:
1. To read the Policy, to make a reasonable effort to understand its
provisions, and to ask the Compliance Officer questions about
those provisions you find confusing or difficult to understand.
2. To comply with the Policy, including its general principles, its
reporting requirements, its prohibitions, its prior notification
requirements, its short-term trading and blackout restrictions.
3. To advise the members of your Immediate Family about the
existence of the Policy, its applicability to their personal
Investment Transactions, and your responsibility to assure that
their personal Investment Transactions comply with the Policy.
4. To cooperate fully with any investigation or inquiry by or on
behalf of the Compliance Officer or the Compliance Committee to
determine your compliance with the provisions of the Policy.
In addition, your acknowledgment will recognize that any failure to comply with
the Policy and to honor the commitments made by your acknowledgment may result
in disciplinary action, including dismissal.
2. Annual Certificate Of Compliance
You are required to certify on an annual basis, on a copy of the form
attached hereto as Appendix III, that you have complied with each provision of
your initial acknowledgment (see above). In particular, your annual
certification will require that you certify that you have read and that you
understand the Policy, that you recognize that you are subject to its
provisions, that you complied with the requirements of the Policy during the
year just ended, and that you have disclosed, reported, or caused to be reported
all Investment Transactions required to be disclosed or reported pursuant to the
requirements of the Policy and that you have disclosed, reported or caused to be
reported all Personal Accounts and Related Accounts that hold or are likely to
hold a Security or Futures Contract in which you have a Beneficial Ownership
interest. In addition, you will be required to confirm the accuracy of the
record of information on file with the Advisor with respect to such Personal
Accounts and Related Accounts.
B. Supervisory Procedures
1. The Compliance Committee
The Policy will be implemented, monitored and reviewed by the Compliance
Committee. The initial members of the Compliance Committee will be appointed by
the management committee of BlackRock. The Compliance Committee, by a simple
majority of its members,
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may appoint new members of the Committee, may replace existing members of the
Committee, and may fill vacancies on the Committee. Among other
responsibilities, the Compliance Committee will consider requests for
case-by-case exemptions (described above) and will conduct investigations
(described below) of any actual or suspected violations of the Policy. The
Compliance Committee will determine what remedial actions, if any, should be
taken by an Advisor in response to a violation of the Policy. The Compliance
Committee will also provide reports (described below) regarding significant
violations of the Policy and the procedures to implement the Policy. The
Compliance Committee may recommend changes to those procedures or to the Policy
to the management of the Advisors. Finally, the Compliance Committee will
designate one person to act as Compliance Officer for all Advisors.
2. The Compliance Officer
The Compliance Officer designated by the Compliance Committee will be
responsible for the day-to-day administration of the Policy for all Advisors,
subject to the direction and control of the Compliance Committee. Based on
information supplied by the management of each Advisor, the Compliance Officer
will forward a copy of the Policy to each Advisory Employee subject to the
Policy and will notify each such person of his or her designation as an Advisory
Employee, Portfolio Employee or Portfolio Manager. The Compliance Officer will
also be responsible for administration of the reporting and prior notification
functions described in the Policy, and will maintain the reports required by
those functions. In addition, the Compliance Officer will attempt to answer any
questions from an Advisory Employee regarding the interpretation or
administration of the Policy. When necessary or desirable, the Compliance
Officer will consult with the Compliance Committee about such questions. The
Compliance Officer may designate one or more Assistant Compliance Officers to
whom the Compliance Officer may delegate any of the duties described in this
paragraph or in the succeeding paragraph, and who shall be empowered to act on
the Compliance Officer's behalf when the Compliance Officer is absent or
unavailable.
3. Post-Trade Monitoring And Investigations
The Compliance Officer will review the Duplicate Broker Reports and other
information supplied for each Advisory Employee so that the Compliance Officer
can detect and prevent potential violations of the Policy. This information may
also be disclosed to the Advisor's auditors, attorneys and regulators. If, based
on his or her review of information supplied for an Advisory Employee, or based
on other information, the Compliance Officer suspects that the Policy may have
been violated, the Compliance Officer will perform such investigations and make
such inquiries as he or she considers necessary. You should expect that, as a
matter of course, the Compliance Officer will make inquiries regarding any
personal Investment Transaction in a Security or Futures Contract that occurs on
the same day as a transaction in the same Security or Futures Contract on behalf
of an Advisory Client. If the Compliance Officer reaches a preliminary
conclusion that an Advisory Employee may have violated this Policy, the
Compliance Officer will report that preliminary conclusion in a timely manner to
the Compliance Committee and will furnish to the Committee all information that
relates to the Compliance Officer's preliminary conclusion. The Compliance
Officer may also report his or her preliminary conclusion and the information
relating to that preliminary conclusion to the Advisor's auditors, attorneys and
regulators.
Promptly after receiving the Compliance Officer's report of a possible
violation of the Policy, the Compliance Committee, with the aid and assistance
of the Compliance Officer, will conduct an appropriate investigation to
determine whether the Policy has been violated and will determine what remedial
action should be taken by the Advisor in response to any such violation(s). For
purposes of these determinations, a majority of the Compliance Committee will
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constitute a quorum and action taken by a simple majority of that quorum will
constitute action by the Committee.
4. Remedial Actions
The remedial actions that may be recommended by the Compliance Committee
may include, but are not limited to, disgorgement of profits, imposition of a
fine, censure, demotion, suspension or dismissal. As part of any sanction, e.g.,
for violation of the Policy's restrictions on short-term trading or trading
during blackout periods, you may be required to reverse or unwind a transaction
and to forfeit any profit or to absorb any loss from the transaction. If an
Investment Transaction may not be reversed or unwound, you may be required to
disgorge any profits associated with the transaction, which profits will be
distributed in a manner prescribed by the Compliance Committee in the exercise
of its discretion. Profits derived from Investment Transactions in violation of
this Policy may not be offset by any losses from Investment Transactions in
violation of this Policy. Finally, evidence suggesting violations of criminal
laws will be reported to the appropriate authorities, as required by applicable
law.
In determining what, if any, remedial action is appropriate in response to
a violation of the Policy, the Compliance Committee will consider, among other
factors, the gravity of your violation, the frequency of your violations,
whether any violation caused harm or the potential of harm to any Advisory
Client, whether you knew or should have known that your Investment Transaction
violated the Policy, whether you engaged in an Investment Transaction with a
view to making a profit on the anticipated market action of a transaction by an
Advisory Client, your efforts to cooperate with the Compliance Officer's
investigation, and your efforts to correct any conduct that led to a violation.
In rare instances, the Compliance Committee may find that, for equitable
reasons, no remedial action should be taken.
5. Reports Of Violations Requiring Significant Remedial Action
In a timely manner, and not less frequently than annually, the Compliance
Committee will report to the management committee of BlackRock, and to the
directors or trustees of each investment company that is an Advisory Client, any
known Policy violation requiring significant remedial action (as defined below)
and the disposition of that violation. For this purpose, a significant remedial
action means any action that has a significant financial effect on the violator.
Evidence suggesting violations of criminal laws will be reported to the
appropriate authorities, as required by applicable law.
6. Annual Reports
The Compliance Committee will furnish an annual report to the management
committee of BlackRock, and to the directors or trustees of each investment
company that is an Advisory Client, that, at a minimum, will:
1. Summarize existing procedures and restrictions concerning personal
investing by Advisory Employees and any changes in those procedures
and restrictions that were made during the previous year;
2. Summarize any violations of the Policy that resulted in significant
remedial action during the previous year; and
3. Describe any changes in existing procedures or restrictions that the
Compliance Committee recommends based upon its experience under the
Policy, evolving industry practices, or developments in applicable
laws or regulations.
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VI. EFFECTIVE DATE
The provisions of this Policy will take effect on October 1, 1998. Amendments
to this Policy will take effect at the time such amendments are promulgated and
distributed to the Advisory Employees governed by this Policy.
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APPENDIX I
Definitions Of Capitalized Terms
The following definitions apply to the capitalized terms used in the Policy:
Advisor
The term "Advisor" means any entity affiliated with BlackRock, whether now in
existence or formed after the date hereof, that is registered as (i) an
investment advisor under the Investment Advisers Act of 1940, as amended, or
(ii) a broker-dealer under the Securities Exchange Act of 1934, as amended,
other than any such investment advisor or broker-dealer that has adopted its own
employee investment transaction policy.
Advisory Client
The term "Advisory Client" means a registered investment company, an
institutional investment client, a personal trust or estate, a guardianship, an
employee benefit trust, or another client with which the Advisor by which you
are employed or with which you are associated has an investment management,
advisory or sub-advisory contract or relationship.
Advisory Employee
The term "Advisory Employee" means an officer, director, or employee of an
Advisor, or any other person identified as a "control person" on the Form ADV or
the Form BD filed by the Advisor with the U.S. Securities and Exchange
Commission, (1) who, in connection with his or her regular functions or duties,
generates, participates in, or obtains information regarding that Advisor's
purchase or sale of a Security by or on behalf of an Advisory Client; (2) whose
regular functions or duties relate to the making of any recommendations with
respect to such purchases or sales; or (3) who obtains information or exercises
influence concerning investment recommendations made to an Advisory Client of
that Advisor or who has line oversight or management responsibilities over
employees who obtain such information or who exercise such influence.
Beneficial Ownership
As a general matter, you are considered to have a "Beneficial Ownership"
interest in a Security or Futures Contract if you have the opportunity, directly
or indirectly, to profit or share in any profit derived from a transaction in
that Security. You are presumed to have a Beneficial Ownership interest in any
Security or Futures Contract held, individually or jointly, by you and/or by a
member of your Immediate Family (as defined below). In addition, unless
specifically excepted by the Compliance Officer based on a showing that your
interest or control is sufficiently attenuated to avoid the possibility of a
conflict, you will be considered to have a Beneficial Ownership interest in a
Security or Futures Contract held by: (1) a joint account to which you are a
party, (2) a partnership in which you are a general partner, (3) a limited
liability company in which you are a manager-member, or (4) a trust in which you
or a member of your Immediate Family has a vested interest. Although you may
have a Beneficial Ownership interest in a Security or Futures Contract held in a
Fully Discretionary Account (as defined below), the application of this Policy
to such a Security or Futures Contract may be modified by the special exemptions
provided for Fully Discretionary Accounts.
As a technical matter, the term "Beneficial Ownership" for purposes of this
Policy will be interpreted in the same manner as it would be under SEC Rule 16a-
1(a)(2) in determining
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whether a person has beneficial ownership of a security for purposes of Section
16 of the Securities Exchange Act of 1934 and the rules and regulations
thereunder.
BlackRock
The term "BlackRock" means BlackRock, Inc.
Compliance Committee
The term "Compliance Committee" means the committee of persons who have
responsibility for implementing, monitoring and reviewing the Policy, in
accordance with Section V(B)(1) of the Policy.
Compliance Officer
The term "Compliance Officer" means the person designated by the Compliance
Committee as responsible for the day-to-day administration of the Policy in
accordance with Section V(B)(2) of the Policy.
Duplicate Broker Reports
The term "Duplicate Broker Reports" means duplicate copies of confirmations of
transactions in your Personal or Related Accounts and of periodic statements for
those accounts.
Exempt Security
The term "Exempt Security" means any Security (as defined below) not included
within the definition of Security in SEC Rule 17j-1(e)(5) under the Investment
Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies; and
3. High quality short-term debt instruments, including, but not limited
to, bankers' acceptances, bank certificates of deposit, commercial
paper and repurchase agreements. For these purposes, a "high quality
short-term debt instrument" means any instrument having a maturity at
issuance of less than 366 days and which is rated in one of the
highest two rating categories by a Nationally Recognized Statistical
Rating Organization, or which is unrated but is of comparable quality.
4. For Advisory Employees employed by BlackRock International, Ltd.,
shares of authorized unit trusts, open-ended investment companies
(OEIC's) and direct obligations of the Government of the United
Kingdom.
Fixed Income Securities
For purposes of this Policy, the term "Fixed Income Securities" means fixed
income Securities issued by agencies or instrumentalities of, or unconditionally
guaranteed by, the Government of the United States, corporate debt Securities,
mortgage-backed and other asset-backed Securities, fixed income Securities
issued by state or local governments or the political subdivisions thereof,
structured notes and loan participations, foreign government debt Securities,
and debt Securities of international agencies or supranational agencies. For
purposes
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of this Policy, the term "Fixed Income Securities" will not be interpreted to
include U.S. Government Securities or any other Exempt Security (as defined
above).
Fully Discretionary Account
The term "Fully Discretionary Account" means a Personal Account or Related
Account (as defined below) managed or held by a broker-dealer, futures
commission merchant, investment advisor or trustee as to which neither you nor
an Immediate Family Member (as defined below): (a) exercises any investment
discretion; (b) suggests or receives notice of transactions prior to their
execution; and (c) otherwise has any direct or indirect influence or control.
In addition, to qualify as a Fully Discretionary Account, the individual broker,
registered representative or merchant responsible for that account must not be
responsible for nor receive advance notice of any purchase or sale of a Security
or Futures Contract on behalf of an Advisory Client. To qualify an account as a
Fully Discretionary Account, the Compliance Officer must receive and approve a
written notice, in the form attached hereto as Appendix VIII, that the account
meets the foregoing qualifications as a Fully Discretionary Account.
Futures Contract
The term "Futures Contract" includes (a) a futures contract and an option on a
futures contract traded on a U.S. or foreign board of trade, such as the Chicago
Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile
Exchange, or the London International Financial Futures Exchange (a "Publicly-
Traded Futures Contract"), as well as (b) a forward contract, a "swap", a "cap",
a "collar", a "floor" and an over-the-counter option (other than an option on a
foreign currency, an option on a basket of currencies, an option on a Security
or an option on an index of Securities, which fall within the definition of
"Security") (a "Privately-Traded Futures Contract"). You should consult with
the Compliance Officer if you have any doubt about whether a particular
Investment Transaction you contemplate involves a Futures Contract. For
purposes of this definition, a Publicly-Traded Futures Contract is defined by
its expiration month, i.e., a Publicly-Traded Futures Contract on a U.S.
Treasury Bond that expires in June is treated as a separate Publicly-Traded
Futures Contract, when compared to a Publicly-Traded Futures Contract on a U.S.
Treasury Bond that expires in July.
Immediate Family
The term "Immediate Family" means any of the following persons who reside in
your household or who depend on you for basic living support: your spouse, any
child, stepchild, grandchild, parent, stepparent, grandparent, sibling, mother-
in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law, including any adoptive relationships.
Investment Transaction
For purposes of this Policy, the term "Investment Transaction" means any
transaction in a Security or Futures Contract in which you have, or by reason of
the transaction will acquire, a Beneficial Ownership interest. The exercise of
an option to acquire a Security or Futures Contract is an Investment Transaction
in that Security or Futures Contract.
Personal Account
The term "Personal Account" means the following accounts that hold or are
likely to hold a Security or Futures Contract in which you have a Beneficial
Ownership interest:
. any account in your individual name;
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. any joint or tenant-in-common account in which you have an interest or
are a participant;
. any account for which you act as trustee, executor, or custodian; and
. any account over which you have investment discretion or have the
power (whether or not exercised) to direct the acquisition or
disposition of Securities or Futures Contracts (other than an Advisory
Client's account that you manage or over which you have investment
discretion), including the accounts of any individual or entity that
is managed or controlled directly or indirectly by or through you.
There is a presumption that you can control accounts held by members
of your Immediate Family sharing the same household. This presumption
may be rebutted only by convincing evidence.
Policy
The term "Policy" means this Employee Investment Transaction Policy.
Portfolio Employee
The term "Portfolio Employee" means a Portfolio Manager or an Advisory
Employee who provides information or advice to a Portfolio Manager, who helps
execute a Portfolio Manager's decisions, or who directly supervises a Portfolio
Manager.
Portfolio Manager
The term "Portfolio Manager" means any employee of an Advisor who has the
authority, whether sole or shared or only from time to time, to make investment
decisions or to direct trades affecting an Advisory Client.
Related Account
The term "Related Account" means any account, other than a Personal Account,
that holds a Security or Futures Contract in which you have a direct or indirect
Beneficial Ownership interest (other than an account over which you have no
investment discretion and cannot otherwise exercise control) and any account
(other than an Advisory Client's account) of any individual or entity to whom
you give advice or make recommendations with regard to the acquisition or
disposition of Securities or Futures Contracts (whether or not such advice is
acted upon).
Related Security
The term "Related Security" means, as to any Security, any instrument related
in value to that Security, including, but not limited to, any option or warrant
to purchase or sell that Security, and any Security convertible into or
exchangeable for that Security. For example, the purchase and exercise of an
option to acquire a Security is subject to the same restrictions that would
apply to the purchase of the Security itself.
Security
As a general matter, the term "Security" means any stock, note, bond,
debenture or other evidence of indebtedness (including any loan participation or
assignment), limited partnership interest, or investment contract, other than an
Exempt Security (as defined above). The term "Security" includes an option on a
Security, an index of Securities, a currency or a basket of
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currencies, including such an option traded on the Chicago Board of Options
Exchange or on the New York, American, Pacific or Philadelphia Stock Exchanges
as well as such an option traded in the over-the-counter market. The term
"Security" does not include a physical commodity or a Futures Contract. The term
"Security" may include an interest in a limited liability company (LLC) or in a
private investment fund.
As a technical matter, the term "Security" has the meaning set forth in
Section 2(a)(36) of the Investment Company Act of 1940, which defines a Security
to mean:
Any note, stock, treasury stock, bond debenture, evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in
oil, gas, or other mineral rights, any put, call, straddle, option, or
privilege on any security (including a certificate of deposit) or on any
group or index of securities (including any interest therein or based on
the value thereof), or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign
currency, or, in general, any interest or instrument commonly known as a
"security", or any certificate of interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, warrant or right to
subscribe to or purchase any of the foregoing,
except that the term "Security" does not include any Security that is an Exempt
Security (as defined above), a Futures Contract (as defined above), or a
physical commodity (such as foreign exchange or a precious metal).
A-5
<PAGE>
EXHIBIT 99.16(c)
(updated February 21, 2000)
CODE OF ETHICS
Provident Distributors, Inc.
BlackRock Distributors, Inc.
Offit Funds Distributor, Inc.
Northern Funds Distributor, LLC.
(collectively, "Distributors")
------------------------------
This Code of Ethics (the "Code") establishes rules of conduct for
persons who are associated with the Distributors referred to above. The Code
governs their personal investments and other investment-related activities.
The basic rule is very simple: put the client's interests first.
Officers, directors and employees owe a fiduciary duty to, among others, the
shareholders of each of the funds for which the Distributors serve as principal
underwriters ("the Funds") to conduct their personal securities transactions in
a manner which does not interfere with fund portfolio transactions or otherwise
take unfair advantage of their relationships with the Funds. Further, all
personal Securities transactions must be conducted in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an individual's
position of trust and responsibility. Persons covered by the Code must adhere
to these general principles as well as comply with the Code's specific
provisions.
This Code is intended to assist persons associated with the
Distributors in fulfilling their obligations under the law. The first part lays
out who the Code applies to, the second part deals with personal investment
activities, the third part deals with other sensitive business practices, and
subsequent parts deal with reporting and administrative procedures.
The Code is very important to the Distributors and persons associated
with the Distributors. Violations may not only cause the Distributors
embarrassment, loss of business, legal restrictions, fines and other punishments
but for persons governed by this Code, demotion, suspension, firing, ejection
from the securities business and very large fines.
I. Applicability
-------------
(A) The Code applies to each of the following:
1. The Distributors referred to at the top of page one of the Code.
2. Any officer, director, employee, or associated person of any of
the Distributors who, in the ordinary course of business, makes,
participates in or obtains information regarding the purchase or
sale of Covered Securities (as defined herein) by the Funds for
which the Distributors act as a principal underwriter or whose
function or duties in the ordinary course of business relate to
the making of any recommendation to a Fund regarding the purchase
or sale of covered securities. This includes the formulation and
making of investment recommendations and decisions, the purchase
and sale of
<PAGE>
securities for the Funds and the utilization of information about
investment recommendations, decisions and trades.
3. Any other officer, director, employee, or associated person of
any of the Distributors not described in (A)2 above.
(B) Definitions
-----------
1. Access Persons. The persons described in items (A)2 above.
--------------
2. Access Person Account. Includes all advisory, brokerage, bank,
---------------------
trust or other accounts or forms of direct or indirect beneficial
ownership in which one or more Access Person and/or one or more
members of an Access Person's immediate family have an economic
interest. Immediate family includes an Access Person's spouse
and minor children living with the Access Person. Investment
partnerships and similar indirect means of ownership are also
included.
3. Affiliates of the Funds. The Distributors.
-----------------------
4. Compliance Officer. The compliance officer of the Distributors.
------------------
5. Covered Persons. The Distributors, the Access Persons and the
---------------
persons described in item (A)3 above.
6. Registered Investment Adviser employer. A registered investment
--------------------------------------
adviser that employees a Covered Person under this code.
7. Covered Security. Means a security as defined in section 2(a)
----------------
(36) of the Investment Company Act of 1940, as amended. Generally,
this definition encompasses any financial instrument treated as a
security for investment purposes and any related instrument such
as futures, forward or swap contract entered into with respect to
one or more securities, a basket of or an index of securities or
components of securities. However, the term Covered Security does
not include direct obligations of the Government of the United
States, bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments,
including repurchase agreements or shares of registered open-end
investment companies. Furthermore, the term Covered Security does
not include: (i) securities purchased or sold in any account over
which the Access Person has no direct or indirect influence or
control; (ii) securities purchased or sold in a transaction which
is non-volitional on the part of either the Access Person or the
Fund; (iii) securities acquired as a part of an automatic dividend
reinvestment plan; and (iv) securities acquired upon the exercise
of rights issued by an issuer pro rata to all holders of a class
of its securities to the extent such rights were acquired from
such issuer, and sales of such rights so acquired.
2
<PAGE>
8. Security Held or to be Acquired by a Fund. Any Covered Security, which,
-----------------------------------------
within the most recent 15 days:
(a) is or has been held by a Fund;
(b) is being or has been considered by the Fund or its investment adviser
for purchase by the fund and
Any option to purchase or sell, and any security convertible into
or exchangeable for, a Covered Security.
9. Limited Offering. Means an offering that is exempt from registration
----------------
under the Securities Act of 1933 pursuant to Section 4(2) or Section
4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities
Act of 1933.
10. Initial Public Offering. Means an offering of securities
-----------------------
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of
1934.
11. Purchase or Sale of a Covered Security includes, among other
--------------------------------------
things, the writing of an options to purchase or sell a Covered
Security.
II. Restrictions on Personal Investing Activities
---------------------------------------------
(A) Fraudulent or Deceptive Practices
---------------------------------
No Covered Person shall, in connection with the purchase or sale,
directly or indirectly, by such person of a Covered Security Held or
to be Acquired by the Funds:
(1) employ any device, scheme or artifice to defraud the Funds;
(2) make to the Funds any untrue statement of a material fact or
omit to state to the Funds a material fact necessary in
order to make the statement made, in light of the
circumstances under which they are made, not misleading;
(3) engage in any act, practice or course of business which
would operate as a fraud or deceit upon the Funds;
(4) engage in any manipulative practice with respect to the
Funds;
(5) trade while in possession of material non-public information
for personal or other investment accounts, or disclosing
such information
3
<PAGE>
to others in or outside the Distributors who have no need
for this information.
It is a violation of federal securities laws to buy or sell securities
while in possession of material non-public information and illegal to
communicate such information to a third party who buys or sells.
(B) Basic Restriction on Investing Activities
-----------------------------------------
If a purchase or sale order is pending or under active consideration
for any Fund, neither the same Covered Security nor any related
Covered Security (such as an option, warrant or convertible security)
may be bought or sold for any Access Person Account.
(C) Initial Public Offerings
------------------------
No Security may be acquired in an Initial Public Offering for any
Covered Person.
(D) Pre-Clearance of Personal Securities
------------------------------------
Transactions
------------
The Distributors will obtain copies of the Codes of Ethics of
Registered Investment Adviser employers to determine whether they are
designed to adequately protect fund shareholders. The Distributors
will rely on the Registered Investment Advisers to enforce their Codes
of Ethics, particularly as the Codes relate to the pre-clearance of
personal securities transactions.
No Security may be bought or sold for an Access Person Account unless
the Access Person complies with the Code of Ethics adopted by his
Registered Investment Adviser employer.
Covered persons not associated with an investment adviser are not
required to pre-clear transactions.
(E) Limited Offering
----------------
No Limited Offering may be purchased for an Access Person Account
unless the Access Person complies with the Code of Ethics adopted by
his Registered Investment Adviser employer.
An Access Person who is not subject to a Code of Ethics of a
Registered Investment Adviser must preclear private placement
transactions with the Distributors.
III. Other Investment-Related Restrictions
-------------------------------------
(A) Gifts
-----
4
<PAGE>
No Person shall accept any gift or other item of more than $100 in
value from any person or entity that does business with or on behalf
of any Fund or is seeking to do business with or on behalf of any
fund.
(B) Service As a Director
---------------------
No Access Person shall commence service on the Board of Directors of
a publicly traded company or any company in which any Fund has an
interest without prior authorization from his Registered Investment
Adviser employer.
IV. Report and Additional Compliance Procedures
-------------------------------------------
(A) The Compliance Officer shall notify each Covered Person who may be
required to make reports pursuant to this Code that such person is
subject to the reporting requirements and shall deliver a copy of
this Code to each such person.
(B) Every Covered Person must submit a report (a form of which is
appended as Exhibit A) containing the information set forth in
paragraph (C) below with respect to transactions in any Security in
which such Covered Person has or by reason of such transactions
acquires, any direct or indirect beneficial ownership (as defined in
Exhibit B) in the Covered Security. These reports will be reviewed by
the Compliance Director.
A Covered Person will be deemed to have complied with the
requirements of this Article IV insofar as the Compliance Officer
receives in a timely fashion duplicate monthly or quarterly brokerage
statements on which all transactions required to be reported
hereunder are described.
(C) A Covered Person must submit the report required by this Article to
the Compliance Officer no later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates
was effected. A report must contain the following information:
1. The date of the transaction, the title, the interest rate and
maturity date (if applicable) and number of shares and the
principal amount of each Security involved;
2. The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
3. The price of the Covered Security at which the transaction was
effected;
4. The name of the broker, dealer or bank with or through whom the
transaction was effected; and
5. The date that the report is submitted by the Covered Person.
5
<PAGE>
(D) Any report submitted to comply with the requirements of this Article
IV may contain a statement that the report shall not be construed as
an admission by the person making such report that he has any direct
or indirect benefit ownership in the Security to which the report
relates.
(E) Within 10 days of commencement of employment and/or registration with
any of the Distributors, or within 10 days of subsequently becoming an
Access Person each Access Person shall be required to disclose all
current personal Covered Securities holdings contained in any Access
Person Account in which such Access Person has an interest. These
holding reports will be reviewed by the Compliance Officer. A holdings
report (a form of which is appended as Exhibit C) must contain the
following information:
1. The title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person.
2. The date that the report is submitted by the Access Person.
(F) Annually each Access Person must submit a report listing all
securities beneficially owned by the Access Person that will be
current as of a date not more that 30 days before the report is
submitted. These holding reports will be reviewed by the Compliance
Officer. A holding report (the form of which is appended as Exhibit C)
must contain the following information:
1. The title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became and Access Person.
2. The name of any broker, dealer or bank with whom the Access Person
maintains an account in which any securities are held for the
direct or indirect benefit of the Access Person.
3. The date that the report is submitted by the Access Person.
(G) Annually each Covered Person must certify on a report (the form of
which is appended as Exhibit D) that he has read and understood the
Code and recognizes that he is subject to such Code. In addition,
annually each Covered Person must certify that he has disclosed or
reported all personal Securities transactions required to be disclosed
or reported under the Code and that he is not subject to any
regulatory disability.
(H) At least annually (or quarterly in the case of Items 3 and 4 below),
each Distributor shall report to the Boards of Directors of the Funds
for which they provide underwriting services:
6
<PAGE>
1. All existing procedures concerning Covered Persons' personal
trading activities and reporting requirements and any procedural
changes made during the past year;
2. Any recommended changes to the Distributors' Codes of Ethics or
procedures;
3. A summary of any material violations of this Code which occurred
during the past quarter and the nature of any remedial action
taken; and
4. Any exceptions to any provisions of this Code of Ethics as
determined under Article VI below.
V. Sanctions
---------
Upon discovering that a Covered Person has not complied with the
requirements of this Code, the Compliance Officer in consultation with
the officers of the relevant Distributor may impose whatever sanctions
within its power they deem appropriate, including, among other things,
suspension or termination of employment and/or registration. Material
violations of requirements of this Code by Covered Persons and any
sanctions imposed in connection therewith shall be reported not less
frequently than quarterly to the Board of Directors of any relevant Fund.
VI. Exceptions
----------
The Compliance Officer in consultation with the officers of the relevant
Distributors reserves the right to decide, on a case-by-case basis,
exceptions to any provisions under this Code. Any exceptions made
hereunder will be maintained in writing by the Compliance Officer and
presented to the Board of Directors of any relevant Fund at its next
scheduled meeting.
VII. Preservation of Documents
-------------------------
This Code, a copy of each report by a Covered Person, a record of any
violation of this Code and of any action taken as a result of the
violation, any written report made hereunder by the Compliance Officer or
Distributors and lists of all persons required to make reports or review
reports shall be preserved with the records of the relevant Distributor
for a five year period in an easily accessible place.
VIII. Other Laws, Rules and Statements of Policy
------------------------------------------
Nothing contained in this Code shall be interpreted as relieving any
Covered Person from acting in accordance with the provision of any
applicable law, rule or regulation or any other statement of policy or
procedure governing the conduct of such person adopted by the
Distributors.
7
<PAGE>
Exhibit A
EXAMPLE ONLY
PROVIDENT DISTRIBUTORS, INC.
OFFIT FUNDS DISTRIBUTOR, INC.
BLACKROCK DISTRIBUTORS, INC.
NORTHERN FUNDS DISTRIBUTOR, LLC
Securities Transactions Report For the Calendar Quarter Ended: ________
To the Compliance Officer:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Firm.
<TABLE>
<CAPTION>
SECURITY DATE OF TRANSACTION No. of DOLLAR AMOUNT OF NATURE OF PRICE BROKER/DEALER OR BANK
SHARES or TRANSACTION TRANSACTION THROUGH WHOM EFFECTED
Principal (Purchase, Sale,
Amount Other)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the quarter referred to above, I established the following account
in which securities were held during the quarter for my direct or indirect
benefit:
1. The name of the broker, dealer or bank with whom you established the
account________________________________________________
2. The date the account was established___________________
This report (i) excludes transactions with respect to which I had no direct
or indirect influence or control, (ii) excludes other transactions not required
to be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the securities listed above.
Except as noted on the reverse side of this report, I hereby certify that I
have no knowledge of the existence of any personal conflict of interest
relationship which may involve the Firm's clients, such as the existence of any
economic relationship between my transactions and securities held or to be
acquired by the Firm for any of its clients.
NOTE: Do not report transactions in direct obligations of the U. S.
---- ---
Government, bankers' acceptances, bank certificates of deposit, commercial paper
and high quality short-term debt instruments including repurchase agreements and
open-end mutual funds.
[_] No transactions to report.
Date:____________________ Signature:______________________________________
8
<PAGE>
Exhibit B
---------
BENEFICIAL OWNERSHIP
--------------------
For purposes of the attached Code of Ethics, "beneficial ownership"
shall be interpreted in the same manner as it would be in determining whether a
person is subject to the provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except the determination of
direct or indirect beneficial ownership shall apply to all securities that a
Covered Person has or acquires. The term "beneficial ownership" of securities
would include not only ownership of securities held by a Covered Person for his
own benefit, whether in bearer form or registered in his name or otherwise, but
also ownership of securities held for his benefit by others (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he has only a remainder
interest), and securities held for his account by pledges, securities owned by a
partnership in which he is a member if he may exercise a controlling influence
over the purchase, sale of voting of such securities, and securities owned by
any corporation or similar entry in which he owns securities if the shareholder
is a controlling shareholder of the entity and has or shares investment control
over the entity's portfolio.
Ordinarily, this term would not include securities held by executors
or administrators in estates in which a Covered Person is a legatee or
beneficiary unless there is a specified legacy to such person of such securities
or such person is the sole legatee or beneficiary and there are other assets in
the estate sufficient to pay debts ranking ahead of such legacy, or the
securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by a Covered Person where such person enjoys "financial
benefits substantially equivalent to ownership." The Securities and Exchange
Commission has said that although the final determination of beneficial
ownership is a question to be determined in the light of the facts of the
particular case, generally a person is regarded as the beneficial owner of
securities held in the name of his or her spouse and their minor children.
Absent special circumstances such relationship ordinarily results in such person
obtaining financial benefits substantially equivalent to ownership, e.g.,
application of the income derived from such securities to maintain a common
home, or to meet expenses that such person otherwise would meet from other
sources, or the ability to exercises a controlling influence over the purchase,
sale or voting of such securities.
A Covered Person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contract,
understanding, relationship, or other agreement, he obtains therefrom financial
benefits substantially equivalent to those of ownership.
A Covered Person also is regarded as the beneficial owner of
securities held in the name of a spouse, minor children or other person, even
though he does not obtain therefrom the aforementioned benefits of ownership, if
he can vest or revest title in himself at once or at some future time.
9
<PAGE>
Exhibit C
---------
EXAMPLE ONLY
PROVIDENT DISTRIBUTORS, INC.
OFFIT FUNDS DISTRIBUTOR, INC.
BLACKROCK DISTRIBUTORS, INC.
NORTHERN FUNDS DISTRIBUTOR, LLC
Holdings Report
For the Year/Period Ended _________________
(month/day/year)
Check Here if this is an Initial Holdings Report
To the Compliance Officer:
As of the calendar year/period referred to above, I have a direct or
indirect beneficial ownership interest in the securities listed below which are
required to be reported pursuant to the Code of Ethics of the Fund:
Security Name Number of Shares Principal Amount
------------- ---------------- ----------------
The name of any broker, dealer or bank with whom I maintain an account in
which my securities are held for my direct or indirect benefit are as follows:
This report excludes securities with respect to which I had no direct or
indirect influence or control and excludes other transactions not required to be
reported.
Date:_________________ Signature:___________________
Print Name:_________________
<PAGE>
ANNUAL CERTIFICATION OF CODE OF ETHICS
--------------------------------------
A. I (a Covered Person) hereby certify that I have read and understood
the Code of Ethics, and recognize that I am subject to its provisions.
In addition, I hereby certify that I have complied with the
requirements of the Code of Ethics and that I have disclosed or
reported all personal Securities transactions required to be disclosed
or reported under the Code of Ethics;
B. Within the last ten years there have been no complaints or
disciplinary actions filed against me by any regulated securities or
commodities exchange, any self-regulatory securities or commodities
organization, any attorney general, or any governmental office or
agency regulating insurance securities, commodities or financial
transactions in the United States, in any state of the United States,
or in any other country;
C. I have not within the last ten years been convicted of or acknowledged
commission of any felony or misdemeanor arising out of my conduct as
an employee, salesperson, officer, director, insurance agent, broker,
dealer, underwriter, investment manager or investment advisor; and
D. I have not been denied permission or otherwise enjoined by order,
judgment or decree of any court of competent jurisdiction, regulated
securities or commodities exchange, self-regulatory securities or
commodities organization or other federal or state regulatory
authority from acting as an investment advisor, securities or
commodities broker or dealer, commodity pool operator or trading
advisor or as an affiliated person or employee of any investment
company, bank, insurance company or commodity broker, dealer, pool
operator or trading advisor, or from engaging in or continuing any
conduct or practice in connection with any such activity or the
purchase or sale of any security.
Print Name: __________________
Signature: ___________________
Date: ______________________
